DRIP Calculator

The "Snowball Effect" Nobody Tells You About

You buy 100 shares of a stock paying 4% dividends. Year 1, you get $200 in dividends. You reinvest. Year 2, you own 104 shares, so you get $208.32 in dividends. Year 3, 108.24 shares, $216.99 in dividends. By Year 20, you own 191 shares (not 100) and your dividends have nearly doubled—all without investing another dollar.

This calculator shows you exactly how that snowball grows.

💡 Expert Tip: Start Young, Stay Patient

DRIP is a time machine. The longer you let it run, the more powerful it gets. A $10,000 investment in a 4% yielder with 7% annual price growth becomes $40,000 in 20 years with DRIP. Without DRIP? Just $29,000. That's an extra $11,000 from doing absolutely nothing.

The secret? Compounding accelerates. The gains in Year 20 are massive because you're earning returns on 20 years of accumulated shares.

David Chen, CFA: "DRIP is the closest thing to 'set it and forget it' investing. I set up DRIPs for my kids' accounts. In 30 years, they'll thank me."

⚠️ Common Mistake: Ignoring the Tax Bill

You didn't get cash, but the IRS still wants their cut. Reinvested dividends are taxable income. If you reinvest $1,000 in dividends, you might owe $150-$200 in taxes (15-20% qualified dividend rate). Make sure you have cash on hand to pay the IRS, or you'll be forced to sell shares just to cover taxes.

Workaround: Use DRIP in tax-advantaged accounts (IRA, 401k, Roth IRA). No tax due until you withdraw (traditional) or never (Roth).

📐 How DRIP Compounding Works

Here's the formula behind the magic:

Each year, your share count grows, which generates more dividends, which buys more shares. It's a self-reinforcing loop.

🎯 Real-World Example: The 30-Year Millionaire

Starting Point: $20,000 invested in a dividend aristocrat stock.

• Dividend Yield: 3% annually
• Share Price Growth: 6% annually
• Time Horizon: 30 years

With DRIP: Final value = $208,000 (shares multiplied from 400 to 726)

Without DRIP (cash out): Final value = $133,000

Difference: $75,000 extra wealth from reinvesting. That's nearly 4x your initial investment just from compounding.

💰 When NOT to Use DRIP

• You need the income now: If you're retired and living off dividends, take the cash.
• The stock is overvalued: DRIP forces you to buy at any price. If the stock is trading at 40x earnings, you're overpaying for new shares.
• You want to diversify: DRIP locks you into one stock. If you want to spread risk, take cash and buy different stocks.
• Tax considerations: If you're in a high tax bracket and don't have cash to pay the tax bill, DRIP can backfire.

🏆 Best Stocks for DRIP

• Dividend Aristocrats: Companies with 25+ years of consecutive dividend increases (e.g., Johnson & Johnson, Coca-Cola).
• Dividend Kings: Even better—50+ years of increases (e.g., Procter & Gamble).
• Low payout ratio: <60% of earnings paid as dividends=room to grow.
• Stable industries: Utilities, consumer staples, healthcare. Avoid high-yield traps in struggling sectors.

❓ Frequently Asked Questions

📚 References

• Investor.gov - Dividend Reinvestment Plans (DRIPs)
• SEC - Dividend Reinvestment Plans
• Investopedia - DRIP Explained