How a dividend reinvestment plan works
A dividend reinvestment plan buys additional shares with each dividend instead of paying it in cash; companies offer DRIPs directly, and many brokerages and funds run their own plans, sometimes with fees.[1] Each reinvested dividend raises the share count, so the next dividend is larger even if the dividend per share stays the same. That is compounding with shares instead of dollars.
A dividend itself is a share of a company's profits paid to shareholders, usually on a fixed schedule.[2] Its yield is the annual dividend divided by the share price.[4]
DRIP vs cash over time
For $10,000 at a 4% yield with 5% dividend growth and 4% price growth, here is the total value and yearly income each way:
| Holding period | Value with DRIP | Without DRIP (shares + cash) | Income with DRIP | Income without |
|---|---|---|---|---|
| 5 years | $14,830 | $14,377 | $593 | $486 |
| 10 years | $22,207 | $19,834 | $931 | $621 |
| 20 years | $51,352 | $35,138 | $2,369 | $1,011 |
| 30 years | $124,157 | $59,010 | $6,303 | $1,646 |
The gap widens with time because reinvested shares earn dividends that buy more shares. The cash path's dividends are counted at face value; if you invested them elsewhere, the gap would shrink by whatever they earned there.
Does DRIP still win with no growth?
Yes, but by less. With a flat share price and a flat dividend, $10,000 at 4% grows to $22,167 over 20 years with DRIP, against $18,000 taking cash. That is close to 4% compounded quarterly, the dividend yield acting like an interest rate. If the share price falls, reinvested dividends buy more shares at lower prices, but the value of everything you hold falls too.
Taxes on reinvested dividends
Reinvesting does not defer tax. In a taxable account, dividends are taxable in the year paid whether you take cash or buy shares; qualified dividends get the lower capital-gains rates and are reported on Form 1099-DIV.[3] Each reinvestment also creates a new purchase lot with its own cost basis, which matters when you sell. Enter a tax rate to see its effect on both paths.
Assumptions, not forecastsDividends can be cut and share prices fall. Reinvesting concentrates more money in the same stock, which raises risk if the company struggles.
When taking the cash makes sense
- You need the income now, for example in retirement.
- The holding is already a large share of your portfolio and you would rather invest elsewhere.
- Your plan charges fees on reinvestment.
For income goals and the capital they need, use the dividend calculator; for a fixed-rate comparison, the compound interest calculator; and to annualize a holding's past growth, the CAGR calculator.
Related calculators
- Dividend calculatorDividend income, yield and the capital an income goal needs
- CAGR calculatorCompound annual growth rate between two values
- Compound interest calculatorDeposits, any compounding, inflation, goal seek, chart and CSV
Frequently asked questions
What is a DRIP?
A dividend reinvestment plan, which automatically uses each cash dividend to buy more shares, often including fractional shares.
Is it better to reinvest dividends?
Over long periods reinvesting usually ends with more value and more income: in the example, $51,352 against $35,138 after 20 years. Taking cash makes sense when you need the income.
Do you pay taxes on reinvested dividends?
Yes. In a taxable account, reinvested dividends are taxed in the year they are paid, the same as cash dividends.
How does a dividend reinvestment calculator work?
It adds shares at each payment date (shares × dividend per payment ÷ price), grows the dividend and price by your rates each year, and compares the result with keeping dividends as cash.