What a DRIP does
A Dividend Reinvestment Plan (DRIP) takes the cash a stock pays you and automatically buys more of that stock. Because those new shares pay their own dividends next time, your share count — and therefore your income — grows on its own. This is the quiet engine behind many long-term fortunes: you do nothing, and compounding does the work. Add monthly contributions on top and the effect accelerates.
How the math compounds
New shares = (Shares × Price × Yield) ÷ Price
Each year the dividend income equals your share count times the dividend per share (price × yield). Reinvesting that income at the current price adds shares. We also grow the share price and the yield annually so the plan reflects a real, appreciating, rising-payout company.
Worked example
Start with 100 shares at $50 (a $5,000 stake) paying 3% yield. Add $200/month for 20 years, with price growing 7% and the dividend growing 5% a year. Your contributions total $48,000. Thanks to price appreciation and reinvested dividends, the ending portfolio can reach well over $150,000 — roughly half of that gain comes from reinvestment and compounding rather than new money.
DRIP vs taking the cash
If you instead took the dividends as cash and spent them, your portfolio would grow only from price appreciation and contributions — typically ending far smaller. Reinvesting is the single highest-leverage habit for a dividend investor, especially inside a tax-advantaged (IRA/401k) account where the dividends are not taxed annually.
5 DRIP tips
- Reinvest automatically. Turn on DRIP in your broker so every cent compounds without a decision.
- Favor growing payers. A rising dividend (yield growth) supercharges the share-count snowball over time.
- Use tax-sheltered accounts. Reinvested dividends are still taxable in a brokerage account; IRAs let the full compounding run.
- Keep contributing. Steady monthly buys smooth price swings via dollar-cost averaging.
- Diversify. One stock's cut dividend can hurt; spread across sectors or use a dividend ETF.
Related calculators
Compare to non-dividend growth with the Compound Interest Calculator, measure returns with the ROI Calculator, or plan income needs with the Dividend Calculator approach. See all Finance tools.