2026-08-04
How Dividend Reinvestment (DRIP) Works
A DRIP (Dividend Reinvestment Plan) automatically uses your dividend to buy more shares of the same stock. The effect sounds simple — and that is why it is so powerful.
The snowball
Year 1: 100 shares paying a $4 dividend give you $400. Reinvested, you now own ~104 shares. Year 2: those extra shares pay a dividend too. Every year the dividend is paid on more shares than the year before — the growth compounds.
Growth beats starting yield
A 3% yield with 6% dividend growth reinvested for 20 years builds far more annual income than a flat 6% yield with no growth. The reinvestment plus growth double-whammies: dividends grow and buy more shares as they do.
Realistic expectations
- Set dividend and price growth to conservative numbers (3–6%) — big growth rates are optimistic.
- Add a monthly contribution: regular investing is what actually builds wealth.
- Remember taxes — reinvested dividends are still taxable in most jurisdictions.
Model the snowball yourself with the DRIP calculator — set growth to 0 first to see the base case, then add growth to see the compounding effect.
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Try the dividend calculator or browse all dividend articles. Educational only — not financial advice.