How dividend reinvestment compounds
A DRIP converts every dividend into new shares the moment it is paid. Say you own 100 shares of a $50 stock paying $2 per share annually — $0.50 per quarter. Your first payment is $50, which buys one more share. Next quarter, 101 shares pay $50.50. The quarter after that, your payment is bigger again. Each individual step is tiny, which is why DRIP looks unimpressive over a year — and startling over twenty, once dividend raises multiply with a growing share count.
The chart above separates position value from cumulative dividends collected, so you can see how much of the final result was manufactured by the reinvestment loop rather than by price appreciation. In long simulations it is common for reinvested dividends to account for a third or more of the ending value.
Where the inputs come from
- Annual dividend per share: listed on any quote page as the forward dividend (e.g. "$2.04"). Use dollars per share, not yield.
- Dividend growth: check the company's dividend history — Dividend Aristocrats have raised payouts for 25+ consecutive years, and 5–8% annual raises are typical of that group.
- Price growth: for mature dividend payers, price tends to follow dividend growth over long periods; matching the two is a reasonable neutral assumption.
DRIP versus taking the cash
Toggle "Reinvest dividends" off and the calculator pays the same dividends out as cash: your share count stays flat and income only grows when the company raises its payout. The difference between the two runs is the compounding premium DRIP earns — a number worth knowing before you decide to spend dividends early in your investing life. The usual arc is decades of reinvestment first, then switching the toggle off in retirement and living on the income the snowball built.