How DRIP Compounding Works
Each dividend payment buys more shares. Those new shares generate their own dividends next year, which buy even more shares โ the classic dividend snowball. Over decades, this compounding effect can add 40โ60% or more to total returns compared to collecting dividends as cash.
DRIP Calculation Logic
Each year: new shares = (total shares ร dividend per share) รท share price. Total shares grows each year; share price compounds at the growth rate. The combined effect of more shares at a higher price produces exponential portfolio growth.
Maximizing DRIP Returns
Hold DRIP positions in a Roth IRA or tax-advantaged account to eliminate the annual dividend tax drag. The higher the yield and the longer the time horizon, the more powerful the compounding effect.
FAQ
Yes โ the simulator assumes fractional shares can be purchased, which most major brokerages now support for DRIP programs. If your brokerage only allows whole shares, the actual result will be slightly lower.
This simulator assumes a constant dividend per share. For dividend growth stocks (like Dividend Aristocrats), actual results would be even better. The current dividend gives a conservative baseline estimate.
โป Taxes on dividends are not included. After-tax returns will be lower in taxable accounts.