How DRIP Compounding Works
The Dividend Reinvestment Plan (DRIP) turns dividend income into new shares automatically. Instead of receiving a quarterly cash payment, each dividend goes toward purchasing fractional shares of the same stock at the payment date price.
The compounding effect has two simultaneous components. First, you accumulate more shares each period — so the next dividend payment applies to a larger share count. Second, as most dividend-growth companies raise their payout every year, each share generates more income over time. Both effects multiply each other, which is why the income curve accelerates sharply in the later years of any long projection.
Yield on Cost: The Number That Actually Matters
Yield on cost (YOC) is your annual dividend income divided by your original cost basis — not the current stock price. It grows every year that the dividend increases, regardless of what happens to the share price.
A $10,000 investment at a 3% starting yield returns $300 in year one. If the company grows its dividend at 8% annually and you reinvest, by year 15 you might earn $900–$1,200 per year on that same $10,000 cost basis — a 9–12% yield on cost. The stock's current yield becomes irrelevant to an investor who bought 15 years ago.
This is why long-term dividend investors care more about dividend growth rate than starting yield. A 2% yielder growing at 12% annually surpasses a static 5% yield in annual income around year 11–12, and compounds past it permanently.
What Dividend CAGR to Use
The dividend CAGR is the most consequential input in the projection over horizons longer than 10 years. Each stock's DividendVisual page shows its historical 5-year and 10-year dividend CAGR. Use the 5-year figure as your baseline, and shade it downward by 1–2 percentage points for conservatism.
Conservative income stocks — utilities, consumer staples, telecoms — typically grow dividends 3–5% annually. Dividend Kings as a group average 6–8%. High-quality compounders like Home Depot, Texas Instruments, and Microsoft have historically grown 8–15%, though sustaining that rate indefinitely is not guaranteed.
Limitations of This Calculator
This calculator assumes a constant stock price for reinvestment — a simplification that makes the math clean but ignores price appreciation and volatility. In practice, DRIP purchases happen at fluctuating prices, which can work in your favor (buying more shares during dips) or against you.
The model also assumes a constant dividend CAGR throughout the projection horizon. No company guarantees this. Dividend cuts — while rare among Dividend Aristocrats — do happen during severe recessions. Use the quality score on each stock's page to assess dividend sustainability before projecting long-term growth.