How dividend investing compounds
Dividends are cash a company pays shareholders, usually quarterly. Three forces grow that income over time: the dividend per share rising each year, your share price appreciating, and, if you reinvest, each payment buying more shares that themselves pay dividends. That last loop, a dividend reinvestment plan or DRIP, is where the real compounding happens.
DRIP vs taking the cash
Reinvesting dividends instead of spending them dramatically increases long-run value because your share count keeps growing, and a larger share count pays larger dividends, which buy still more shares. Toggle the dividend setting above to see the gap between reinvesting and taking the income as cash on the same starting portfolio.
Assumptions and limits
- This is a smooth projection; real dividends can be cut, and prices move unevenly.
- It ignores taxes. In a taxable account, dividends are taxed in the year they are paid, even if reinvested.
- A very high yield paired with high growth is rare; sustainable dividend growers usually yield less up front.