Why use this calculator
Reinvesting dividends is the least dramatic decision in investing and one of the most consequential, because its effect is invisible for years and then substantial. A dividend reinvestment plan uses each payment to buy more shares, which pay dividends of their own, so the share count compounds alongside the share price.
The difficulty in judging it is that the effect is almost undetectable over five years and transformative over thirty, which is exactly the wrong shape for human intuition. This calculator makes the crossover visible by modelling both paths side by side, and by separating the three things that actually move: how many shares you hold, what each is worth, and what each pays. Conflating the last two is the standard error and it overstates the result badly.
How to use it
- Enter the lump sum you are investing at the start.
- Take the starting dividend yield from the fund or share you are considering, remembering that a broad market index typically yields between one and a half and two and a half per cent while dedicated income funds run higher.
- Enter the rate you expect the dividend per share to grow each year, which for an established payer is usually four to seven per cent, then enter expected price appreciation separately and do not double count the same growth in both fields.
- Set the holding period, then enter the tax you pay on dividends, which is zero inside a retirement or tax-sheltered account and your marginal rate outside one.
What each result means
- Value with reinvestment
- The final portfolio value when every dividend buys more shares. Growth comes from both a rising price and a rising share count.
- Yearly dividend income at the end
- The dividends the reinvested holding would pay in the year after your horizon if you switched to taking them as cash, after your dividend tax rate. It shows the income stream the compounding has built.
- Value without reinvestment
- The original shares at the final price, plus dividends collected as cash and not reinvested anywhere. This is the honest comparison.
- Reinvestment advantage
- What compounding added over simply collecting the cash. It stays small for a decade and then grows quickly, which is why patience is the active ingredient.
- Shares held at the end
- How many shares dividends have accumulated. Under reinvestment this rises every year even if you never add another dollar.
- Extra shares bought by dividends
- The share count created purely by reinvestment. Each one pays its own dividends, which is where the compounding comes from.
- Cash dividends if not reinvested
- Total cash you would have taken over the period, after tax. Compare it against the reinvestment advantage to see what taking income costs.
- Compound annual growth rate
- The single annual rate that turns your opening investment into the reinvested final value, useful for comparing against other options.
- Yield on original cost
- The final dividend measured against what you originally paid. A long-held dividend grower can yield double digits on cost while the market yield looks ordinary.
- Market yield at the end
- The dividend against the final share price. It stays near the starting yield when price and dividend grow at similar rates.
The formula
Each year the dividend received is shares held multiplied by dividend per share, reduced by the tax rate. Under reinvestment those net dividends buy additional shares at the current price, so shares held increases to shares plus net dividend divided by price. The share price then grows by the appreciation rate and the dividend per share grows by the dividend growth rate, independently of each other. Final value with reinvestment is shares held multiplied by final price. Without reinvestment it is the original share count at the final price, plus every net dividend accumulated as cash.
How this number is used in practice
Yield on cost is the concept this calculator exists to show. A share bought at a three per cent yield whose dividend grows seven per cent a year is paying roughly twelve per cent on the original purchase price after twenty years, even though anyone buying it that day still sees a three per cent yield.
That is why long-term income investors care far more about dividend growth than about starting yield, and why a high headline yield is often a warning rather than an attraction: an unusually high yield frequently means the market expects the dividend to be cut.
Tax placement changes the answer more than most other choices. Inside a retirement or tax-sheltered account, every dividend reinvests in full. In a taxable account the tax is due whether or not you reinvest, so the reinvested amount is the after-tax dividend and the compounding is meaningfully slower.
Australian investors receive franking credits that can offset or eliminate the tax on fully franked dividends, and UK investors have a dividend allowance before tax applies, so the effective rate to enter here is often lower than a headline marginal rate.
The practical decision is usually not whether reinvestment works but when to stop. Accumulating investors reinvest automatically and ignore it. Retirees switch the plan off and take the dividends as income, which is exactly what the without-reinvestment column models. The common mistake sits between the two: taking dividends as cash during the accumulation years and letting them sit in a transaction account, which is the worst of both, giving up the compounding without spending the money on anything.
Worked examples
$10,000 at a 3.5% yield, 5% dividend growth, 5% price growth, 20 years, tax free
$52,795.02 with reinvestment against $38,106.06 without, an advantage of $14,688.96
The same investment held in a taxable account at a 32% marginal rate
$42,470.61 against $34,402.67, so tax cuts the advantage from $14,688.96 to $8,067.93
$25,000 at a 4% yield with 3% dividend growth and 4% price growth over 30 years
Yield on original cost reaches 9.71% against a market yield of 2.99%, and reinvestment adds $98,194.21
When people use it
- Deciding whether to switch a dividend reinvestment plan on or off in a brokerage account
- Comparing a high-yield holding against a lower-yielding dividend grower over a long horizon
- Showing why taking dividends as cash during accumulation years is costly
- Estimating yield on cost for a long-term income plan approaching retirement
- Quantifying how much dividend tax in a taxable account reduces long-run compounding
Tips
- Do not enter the same growth twice. Dividend growth and price appreciation are separate inputs and doubling them up overstates the result badly.
- Dividend growth matters more than starting yield over long horizons. A 3% yield growing 7% beats a static 5% within about fifteen years.
- An unusually high yield is often a warning that the market expects a cut, not a bargain.
- Reinvest inside a tax-sheltered account where you can. The dividend compounds in full instead of after tax.
- Check whether your plan buys fractional shares. Whole-share-only plans leave cash idle every period.
- Switch reinvestment off when you actually need the income, not before. Cash sitting in a transaction account is the worst of both options.
What it assumes, and where it stops being accurate
- Assumes constant rates for dividend growth and price appreciation. Real markets deliver those returns unevenly, and sequence matters for anyone drawing an income.
- Assumes dividends are reinvested annually at the year-end price. Most real plans reinvest quarterly, which is slightly more favourable than modelled.
- Assumes fractional shares are available. Plans that only buy whole shares leave a small residue uninvested each period.
- Ignores brokerage and plan fees. Most dividend reinvestment plans are free, but a per-trade brokerage on small reinvestments would erode the advantage.
- Ignores capital gains tax on eventual sale and any franking credits or dividend allowances that reduce the effective rate.
- Assumes the dividend is never cut. A suspension removes the compounding engine entirely, which is the main risk in high-yield holdings.
Terms used on this page
- DRIP
- Dividend reinvestment plan: dividends automatically buy more shares rather than paying cash.
- Dividend per share
- The cash paid on each share, which grows separately from the share price itself.
- Yield on cost
- The current dividend expressed against the original purchase price rather than the market price.
- Dividend growth
- The annual rate at which a company increases its dividend per share.
- Franking credit
- An Australian tax credit for company tax already paid, which can offset tax on dividends.
Questions people ask
- What is a DRIP?
- A dividend reinvestment plan automatically uses each dividend to buy more shares of the same holding instead of paying cash. Most brokers and funds offer it at no cost, and many companies historically offered a small discount to the market price on shares issued this way.
- Should I always reinvest dividends?
- Reinvest while you are accumulating and do not need the income, because that is when compounding has time to work. Switch it off when you need the cash flow. The wasteful middle option is taking dividends as cash and leaving them idle in a bank account.
- Are reinvested dividends still taxed?
- Yes, in a taxable account. Tax is assessed when the dividend is declared, regardless of whether you receive cash or shares, so you can owe tax on income you never actually saw. Inside a retirement or tax-sheltered account this does not apply.
- What is yield on cost?
- The current dividend measured against what you originally paid rather than today's price. After decades of dividend growth it can reach double digits, which is why long-term holders of dividend growers report yields that look impossible to a new buyer.
- Does dividend growth matter more than yield?
- Over long horizons, yes. A three per cent yield growing seven per cent annually overtakes a flat five per cent yield in roughly fifteen years and then pulls away, because the growing payment compounds while the static one does not.
- What happens if the dividend is cut?
- The compounding engine stops and the calculation above no longer holds. This is the main risk in chasing high yields, because an unusually high yield often reflects a share price that has already fallen in anticipation of exactly that cut.
Use this with
DRIP Calculator answers one part of the question. These pick up where it stops: Compound Interest Calculator, Dividend Yield Calculator, Net Worth Calculator and Currency Converter.
Where these figures come from
This calculation is jurisdiction-neutral arithmetic. No country-specific rules are applied.
- MoneySmart: Shares. Australian guidance on dividends, franking and reinvestment plans
- US Securities and Exchange Commission: Investor.gov. Dividend reinvestment plans and compounding explained for US investors
- MoneyHelper: Investing. UK guidance on dividends, allowances and tax-sheltered accounts
DRIP Calculator produces an estimate for general information. It is not financial, tax, medical, legal or engineering advice. read the full disclaimer. Spotted a wrong number? Report it and it gets fixed. The form picks up this calculator and the inputs you used.