DRIP Calculator

A dividend is paid per share. Own 200 shares of a stock paying $1.75 a share each year and the income is $350. A dividend reinvestment plan routes that payment into more shares instead of cash, so the next payment is calculated on a slightly larger holding, and the one after that on a larger one still. Nothing exotic is happening: it is compound growth with the dividend, rather than interest, as the compounding ingredient, and with the share count, rather than the balance, as the thing visibly growing.

The plans come in two forms, and the difference shows up in the details of this model. Company-run DRIPs, administered by the company's transfer agent, commonly reinvest into fractional shares, so every cent of the dividend works immediately, and some offer a discount on reinvested shares, described by the Nova Scotia Securities Commission as sometimes 2 to 5%. Broker-run synthetic DRIPs usually buy whole shares only and pay the leftover out as cash, which strands a small residue each quarter. This calculator models fractional reinvestment with the discount as an input you set, defaulting to zero, so a synthetic-plan holder should read the result as the ceiling of what the habit produces rather than a statement figure.

What reinvestment does not do is make the dividend free or the stock safe. The compounding stream depends on the company continuing to pay, and ideally to raise, its dividend for the entire horizon, and on a share price that cooperates at least mildly. The inputs here are held perfectly smooth because a calculator has to hold something still; the sections below the worked example are about how to stress them.

It concentrates. Every reinvested dollar buys the same company. A portfolio that starts diversified drifts toward its dividend payers, and a single payer that cuts its dividend damages both the income stream and, usually, the share price at the same moment. Reinvestment is a reason to watch position size more carefully, not less.

It does not defer tax. In a taxable account a reinvested dividend is taxed as if you had received the cash, because in the eyes of the tax rules you did, and then chose to buy shares. Keep the records: each reinvestment adds a small purchase lot with its own cost basis, and twenty years of quarterly lots is a real bookkeeping tail if your broker's reporting is incomplete.

It assumes the dividend survives. The two inputs doing the heavy lifting in any long DRIP projection are the dividend growth rate and the starting yield, compounded smoothly for decades. Companies freeze and cut dividends. Stress the model with dividend growth at zero and a lower price growth rate, and look at the no-contribution case, before treating the default column as a plan.

It is not the only compounding habit. Taking dividends in cash and directing them, with your contributions, at whatever is underweight in a diversified portfolio compounds too, with less single-stock concentration. The comparison on this page isolates reinvestment in the same stock because that is what a DRIP does, not because it is the only way to put dividends to work.

Enter the yield from the stock's current dividend and price, not a trailing figure from a year when the price was different. Set the dividend growth rate from the company's actual record of increases, and be suspicious of any rate you would not defend out loud; a decade of increases is evidence, a century of compounding at that rate is arithmetic. Run three cases: your honest central case, a flat-dividend case with dividend growth at zero, and a stress case with price growth lowered. The distance between the three is the range of futures the habit actually offers. If your plan offers a reinvestment discount, enter it; over 80 quarters a 3% discount is a measurable, and genuinely free, addition.