In short: Dividend reinvestment means using each dividend payment to buy more shares of the same investment instead of taking the cash. Programs that do this automatically are called dividend reinvestment plans, or DRIPs. They can be run by a brokerage or offered directly by a company.
The formula
Shares bought per payment
New shares = Net dividend payment ÷ Share price on the payment date
Payment size
Dividend payment = Shares owned × Annual dividend per share ÷ Payments per year
Simplified growth with no price or dividend change
Ending value ≈ Starting value × (1 + Yield ÷ n)^(n × Years)
n is the number of payments per year. This only holds if price and dividend stay constant.
Why reinvesting compounds
When a dividend buys more shares, those new shares receive the next dividend too. Each payment is slightly larger than the last, even if the company never raises its dividend. Over long periods this snowball effect can make a large difference to both share count and income.
Compounding works in both directions. Reinvesting also means buying more shares when prices are falling and adding to a position that may be declining. Reinvestment increases exposure to one investment; it does not reduce risk.
Brokerage DRIPs vs. company plans
- Many brokerages let you switch on reinvestment for individual holdings, often buying fractional shares so the entire payment is invested.
- Some companies run their own plans through a transfer agent. These may allow optional cash purchases and occasionally offer shares at a discount. Fees and rules vary by plan.
- Reinvested dividends usually buy shares at the market price on or around the payment date, so you do not choose the price.
Reinvested dividends are still taxable
In a regular taxable brokerage account, reinvested dividends are generally treated as if you received the cash and then bought shares. IRS Publication 550 explains that you must still report the dividends as income, and if a plan lets you buy shares below fair market value, you report the fair market value of those shares as dividend income.
Each reinvestment also creates a new purchase with its own cost basis. Keeping records, or relying on your broker's cost-basis reporting, helps you calculate gains correctly when you sell.
Modeling DRIP in the calculator
With DRIP switched on, the Dividend Calculator takes each payment, subtracts any tax rate you entered, and buys shares at that month's projected price. With DRIP off, payments are tracked as cash that earns nothing. The results panel shows both scenarios side by side using the same inputs.
Worked examples
Hypothetical example: two quarters of reinvestment
- You own 200 shares priced at $40. The quarterly dividend is $0.40 per share.
- First payment: 200 × $0.40 = $80, which buys $80 ÷ $40 = 2 new shares. You now own 202 shares.
- Second payment: 202 × $0.40 = $80.80, which buys 2.02 shares at the same $40 price. You now own 204.02 shares.
Result: Each payment is slightly larger than the one before because the reinvested shares also earn dividends.
Hypothetical example: 20 years with and without DRIP
- Start with $10,000 at a 4% yield, paid once a year. Assume the share price and dividend never change and there are no taxes or contributions.
- Without reinvestment: you collect $400 a year, or $8,000 over 20 years. Total value is $10,000 in shares + $8,000 cash = $18,000.
- With reinvestment: value grows 4% a year, so $10,000 × 1.04^20 ≈ $21,911.
Result: Reinvesting produces roughly $3,900 more in this simplified scenario. Real results depend on price changes, dividend changes, and taxes.
Examples are hypothetical and use round numbers for illustration. They do not describe any real security.
Common misconceptions
- “If I reinvest, I don't owe tax on the dividends.” In a taxable account, reinvested dividends are generally taxable in the year they are paid, the same as cash dividends.
- “DRIP always beats taking cash.” Reinvesting adds to the same holding regardless of price or prospects. Taking cash can make sense for income needs, rebalancing, or diversification. It depends on your situation.
- “Reinvestment guarantees growth.” If the share price falls or the dividend is cut, reinvested money can lose value like any other investment.
Run your own numbers with these assumptions.
Use the Dividend CalculatorFrequently asked questions
Does DRIP buy fractional shares?
Many brokerages and company plans buy fractional shares so the full payment is invested. Check your provider's rules, since some only buy whole shares and pay the remainder in cash.
Can I turn DRIP on for some holdings and not others?
Most brokerages let you choose reinvestment holding by holding. You can model different choices in the calculator by running it separately for each holding.
Is a DRIP calculator different from a dividend calculator?
A DRIP calculator is a dividend calculator that models reinvestment. This calculator does both: switch reinvestment on or off and compare the results.
Sources
Next step
Continue with payout frequency, or plug what you've learned into the dividend calculator and compare a few scenarios.