Transparent method
The formula
Worked example
Example inputs
How to interpret the result
Reinvesting dividends buys more shares, and those shares pay dividends of their own. Investing $25,000 at a 3 percent yield with 5 percent price growth for 15 years reaches about $79,304 with reinvestment, against about $51,973 without. The second figure is price growth only, so it leaves out the dividends taken as cash along the way. The gap therefore overstates what reinvesting adds, and the honest comparison counts the cash received too.
Before you rely on it
What to check
Add the tax on dividends, which the model lets you set as a drag. Dividends reinvested in a taxable account are still taxed in the year they are paid.
The common error
Where people go wrong with dividend reinvestment calculator
Reading the advantage as pure profit. Part of the gap is cash you would have received and spent instead, and the two paths are not the same money.
Sensitivity evidence
How annual dividend yield changes the estimated value with reinvestment
| Annual dividend yield | Estimated value with reinvestment | Estimated value without reinvestment | Reinvestment advantage |
|---|---|---|---|
| 1.0% | $59,914 | $51,973 | $7,941 |
| 2.0% | $68,976 | $51,973 | $17,003 |
| 3.0%worked example | $79,304 | $51,973 | $27,331 |
| 4.0% | $91,062 | $51,973 | $39,089 |
| 5.0% | $104,431 | $51,973 | $52,458 |
Every input, tested
Which input moves the estimated value with reinvestment most
| Input | Tested from | To | Estimated value with reinvestment at each end | Swing |
|---|---|---|---|---|
| Years invested | 11.0 years | 19.0 years | $58,291 to $107,893 | $49,602 (63%) |
| Annual dividend yield | 2.0% | 4.0% | $68,976 to $91,062 | $22,086 (28%) |
| Annual price growth | 4.0% | 6.0% | $68,976 to $91,062 | $22,086 (28%) |
| Starting investment | $22,500 | $27,500 | $71,374 to $87,235 | $15,861 (20%) |
| Annual dividend tax drag | 0.000% | 0.250% | $79,304 to $79,222 | $83 (0.1%) |
Two variables at once
Estimated value with reinvestment by annual dividend yield and starting investment
| Annual dividend yield \ Starting investment | $20,000 | $25,000 | $30,000 |
|---|---|---|---|
| 1.0% | $47,931 | $59,914 | $71,897 |
| 2.0% | $55,181 | $68,976 | $82,771 |
| 3.0% | $63,443 | $79,304 | $95,165 |
| 4.0% | $72,850 | $91,062 | $109,274 |
| 5.0% | $83,545 | $104,431 | $125,317 |
Step by step
The worked example, input by input
| Input | Value used |
|---|---|
| Starting investment | $25,000 |
| Annual dividend yield | 3.0% |
| Annual price growth | 5.0% |
| Years invested | 15.0 years |
| Annual dividend tax drag | 0.000% |
| Estimated value with reinvestment | $79,304 |
| Estimated value without reinvestment | $51,973 |
| Reinvestment advantage | $27,331 |
Where the inputs come from
Starting investment is the amount held. Annual dividend yield is the yield on the current price, and annual price growth is your assumption for how the share price rises apart from dividends. The tax drag input models the tax paid on dividends each year in a taxable account, as a percentage of the dividend. Choose yields and growth rates from the fund's or company's history and be conservative.
Using the estimated value with reinvestment in a real decision
Taking the income instead makes sense when you need it to live on.
When the result stops applying
The model assumes shares can be bought at the modeled price with no fees and that yield stays constant, but yield moves with price. Reinvested dividends in a taxable account are still taxed in the year paid, which the tax drag input approximates. The comparison shows the value with cash taken as cash, not the effect of spending it.
What to compare it with
For dividend income growth, see the dividend growth calculator, and for the starting yield the dividend yield calculator. The compound interest page covers reinvestment in a general way, and the after-tax return calculator helps with the tax side. Many brokers offer automatic reinvestment with no commission.
People also ask
Frequently asked questions
Are reinvested dividends taxed?
Yes, in a regular taxable account you owe tax on dividends in the year they are paid, even if you reinvest them. Inside an IRA or 401(k) they are not taxed until withdrawal or not at all in a Roth.
When should I take dividends as cash?
When you need the income to live on, or to rebalance into other assets. Otherwise reinvesting tends to produce more growth.
What is a DRIP?
A dividend reinvestment plan automatically uses dividends to buy more shares, often fractional ones and often without commission.