The problem: people pick dividend stocks by current yield, not by what they'll yield for you
A stock paying 3% today looks inferior to one paying 5%. Most screens rank by current yield, and most buyers stop there. But a 3% yielder that grows its dividend 8% per year will be paying you 6.5% on your original investment within 10 years — and 14% within 20. A 5% yielder that never raises its dividend stays at 5% forever. Over 20 years with reinvestment, the 3% grower produces more total income and a higher portfolio value. Current yield is a snapshot. Yield on cost — the annual dividend divided by what you actually paid — is the number that tells you whether a dividend growth strategy is working.
The tool projects dividend income, DRIP share accumulation, yield on cost, and total return over any time horizon. Understanding what the projection assumes (and what it ignores) is the difference between a useful model and a false sense of precision.
Fastest path
Open the Dividend Calculator, enter your initial investment and share price, pick the dividend input mode (yield percentage or dollar amount per share), set the dividend growth rate and share price growth rate, enter your tax rate, toggle DRIP on or off, and set the time horizon. The Overview tab shows initial shares, final shares, Year 1 and final-year dividend income, total dividends pre- and after-tax, final portfolio value, and yield on cost. The Year-by-Year tab shows a table with shares, price, dividend per share, dividend received, new shares from DRIP, and portfolio value for each year.
How DRIP compounds share count
DRIP (Dividend Reinvestment Plan) takes each dividend payment and buys more shares with it. Those new shares generate their own dividends next year, which buy more shares, and the cycle repeats. The effect is exponential, not linear.
Each year, the tool computes: gross dividend = shares times dividend per share. Tax is applied: net = gross times (1 minus tax rate). If DRIP is on, the net amount buys new shares at the end-of-year price: newShares = netDividend / priceEnd. The share count grows every year, and each year's dividend income is computed on the larger share count.
Without DRIP, the share count stays flat. Dividends are paid out as cash, and the total return is portfolio value (shares times price growth) plus accumulated after-tax cash dividends. With DRIP, the dividends are already inside the portfolio value as additional shares — the tool does not double-count them.
Worked example: $10,000 at $50 per share = 200 shares. 4% yield ($2/share), 5% dividend growth, 6% price growth, 15% tax, DRIP on, 20 years.
Year 1: 200 shares × $2.00 = $400 gross, $60 tax, $340 net
Buy 6.41 shares at $53.00 (end-of-year price) → 206.41 shares
Year 10: ~290 shares × $3.10 = ~$900 gross → ~$765 net → buy ~11.5 shares
Year 20: ~471 shares × $5.06 = ~$2,382 gross → ~$2,025 net → buy ~24.2 shares
After 20 years, the share count has grown from 200 to roughly 471 — more than doubled — purely from reinvested dividends. The Year 1 gross income was $400. The Year 20 gross income is around $2,382, nearly 6 times the starting income. That growth comes from two compounding forces: more shares (DRIP) and higher dividend per share (dividend growth rate).
Yield on cost: the number that tracks your real return
Yield on cost = (current annual dividend per share times total shares) / original investment times 100. In the example above, the final-year yield on cost is roughly 11.9% — your original $10,000 is generating $1,190 in annual dividends. The stock's current yield (dividend per share divided by current price) is still around 3.8%, because the price grew too. But your yield on cost is triple the current yield because the dividend grew while your cost basis stayed fixed at $10,000.
This is the core argument for dividend growth investing. A stock that raises its dividend every year becomes a higher-yielding asset on your original investment, even if its current yield never changes. The tool shows yield on cost in the Overview tab so you can see this effect directly. Compare it with and without DRIP — DRIP amplifies yield on cost because the reinvested shares also earn the growing dividend.
Dividend growth vs price growth: independent levers
The tool lets you set dividend growth and price growth separately. This is not a simplification — it reflects reality. A company can raise its dividend faster than its stock price rises (the current yield goes up over time) or slower (the current yield goes down).
If dividend growth exceeds price growth, the stock is effectively becoming a higher yielder. This happens when a company consistently raises its payout but the market does not reprice the stock proportionally. If price growth exceeds dividend growth, the current yield falls — the stock price is rising faster than the payout, which is common for companies in a growth phase that are starting to pay dividends.
Setting both growth rates to the same value keeps the current yield constant. Setting dividend growth higher than price growth models a maturing company returning more cash to shareholders. Setting price growth higher models a growth company where the market values capital appreciation over dividend yield.
Tax and DRIP interaction
The tool applies the tax rate to gross dividends each year before reinvestment. With DRIP on, you pay tax on dividends you never see as cash — the after-tax amount goes straight into new shares. This matches what happens in a taxable brokerage account with DRIP enabled: you owe tax on the dividend even though it was reinvested.
For tax-advantaged accounts (IRA, 401k, Roth IRA), set the tax rate to 0%. In those accounts, dividends are either tax-deferred (traditional) or tax-free (Roth), so the full gross amount is reinvested. The tool does not distinguish between qualified and ordinary dividend tax rates — in the US, qualified dividends are taxed at the long-term capital gains rate (15-20% for most taxpayers), while ordinary dividends are taxed at the income rate. Use 15% as a reasonable default for qualified dividends in a taxable account.
Gotchas
- The model assumes constant growth rates for decades. Real companies do not grow dividends at a fixed rate for 20 years. They raise dividends faster during expansions, freeze them during recessions, and cut them during crises. A 5% growth rate entered into the tool is a 5% annual growth assumption applied uniformly — it will overstate income if the company cuts its dividend in year 12.
- No inflation adjustment. The tool shows nominal dollars. $50,000 in dividend income 20 years from now has less purchasing power than $50,000 today. If you want real (inflation-adjusted) returns, reduce both growth rates by your expected inflation rate — a 5% nominal dividend growth rate with 3% inflation is a 2% real growth rate.
- The tool compounds annually. Most dividend stocks pay quarterly, and quarterly DRIP buys shares four times per year, slightly accelerating compounding. The annual model understates DRIP returns by a small amount — the more frequent reinvestment captures price movements within the year that the annual model ignores.
- DRIP reinvests at end-of-year price. The tool uses the end-of-year share price for DRIP purchases. In reality, each quarterly reinvestment buys at that quarter's price, which may be higher or lower than the end-of-year price. The annual simplification smooths out intra-year price volatility.
- Yield on cost is backward-looking. It tells you what your past investment earns today. It does not tell you what a new buyer would earn — they pay the current price and get the current yield. Yield on cost is a tracking metric for your existing position, not a buy signal for new capital.
Summary
- DRIP reinvests after-tax dividends into new shares, compounding share count and dividend income exponentially. The tool models this with annual reinvestment at end-of-year prices.
- Yield on cost = current annual dividend times total shares divided by original investment. With dividend growth and DRIP, it climbs every year — this is the metric that shows whether a dividend growth strategy is working. A 3% yielder with 8% growth beats a 5% yielder with no growth over any horizon longer than about 10 years.
- Dividend growth and price growth are independent inputs. When dividend growth exceeds price growth, current yield rises. When price growth exceeds dividend growth, current yield falls.
- The model assumes constant growth, no dividend cuts, no inflation, and annual compounding. Use it for projection, not prediction. For long-term compounding without dividends, use the Compound Interest Calculator. For loan cost analysis, use the Loan Calculator. For yield percentage calculations, use the Percentage Calculator.