What Is DRIP? Dividend Reinvestment Explained
A dividend reinvestment plan, or DRIP, uses cash dividends to buy more of the same holding instead of paying them out. The account then earns the next dividend on a larger starting value. That is mechanical compounding of the dividend — not a promise that the share price will rise.
Key takeaways
- Each year: dividend = that year’s starting value × that year’s yield.
- Reinvest by adding the dividend back; then add any contribution at year-end.
- Yield then grows by the dividend-growth rate you typed.
- This projection has no separate price-appreciation rate and no tax drag.
How the projection works
Each year: dividend = starting value × that year’s yield; add it back only if you reinvest; then add the contribution.
Yield here is the current yield on that year’s starting value, not yield on cost. A 2% yield on $10,000 pays $200 that year, whether you bought years ago at a different price or not.
Without reinvestment, dividends leave as cash and the account grows only by contributions. With reinvestment, those dividends stay in and earn later yields.
A worked example
Start with $10,000. Yield is 2%, dividend growth 5%, and you add $1,200 at each year-end, for 5 years.
- With reinvestment the account ends at about $17,439.53.
- Without reinvestment the account ends at $16,000, and $1,383.28 was taken as cash dividends.
The gap is the dividends that stayed in, plus the extra yield they earned later. Try the same inputs in the DRIP calculator.
What DRIP tells you
It isolates the effect of putting dividends back to work, given a starting value, a yield path, and optional contributions. Holding periods of different lengths can be compared on that same mechanical path.
What DRIP leaves out
Share prices move. This model does not. It also ignores taxes, fees, and skipped dividends. A company can cut the dividend; the typed yield path will not know. Yield on cost — what you earn on the price you originally paid — is a different statistic, and this calculator does not compute it.
If the path is one lump sum with no extra cash and no dividends to model, CAGR is the simpler annualized reading of a start and an end.
Using it next to a live company
A company page such as Apple may show a dividend, with an as-of date. That snapshot is not a 5-year yield path. Type the starting value, yield, and growth yourself. The ranking will not invent them.
For general education only. Nothing here is investment advice.
Frequently asked questions
- What is a DRIP?
- A dividend reinvestment plan uses cash dividends to buy more of the same holding instead of paying them out. The MarketCapLens DRIP calculator pays a dividend on that year’s starting value, optionally adds it back, then adds your contribution at year-end.
- Does a DRIP projection include price growth or taxes?
- Not this one. The holding grows from reinvested dividends and contributions only. There is no separate price-appreciation rate and no tax drag. Yield is the current yield on that year’s starting value, not yield on cost.
- What is the worked example?
- $10,000 at a 2% yield, 5% dividend growth, and $1,200 contributed each year for 5 years ends at about $17,439.53 with reinvestment and $16,000 in the account without it. Without DRIP, $1,383.28 is taken as cash dividends.