investing ~4 min read
Dividend reinvestment (DRIP) and yield on cost, explained
How reinvesting dividends compounds a portfolio, why yield on cost rises over time, and the math behind both — with a live DRIP calculator to run your own numbers.
A DRIP reinvests each dividend into more shares, which then pay their own dividends. Two numbers tell the story:
Yield on cost = current annual dividend income ÷ what you investedA position bought at a 3% yield can pay 8–10% on cost two decades later — because the per-share dividend grows and (with DRIP) your share count keeps growing.
A dividend portfolio runs on two engines that people routinely conflate: the share price, which may appreciate, and the dividend, a cash payout per share that often grows on a schedule of its own. Reinvesting links them — each dividend buys more shares, which appreciate and pay more dividends. This guide separates the two engines, explains the one number that makes a dividend-growth strategy visible, and gives you a calculator to project your own.
The two engines
Price growth is the obvious one: shares worth more later than now. Dividends are the quieter engine, and the key insight is that the per-share dividend grows independently of the price. A company yielding 3% today that raises its dividend 6% a year is paying a larger dollar amount per share every year, regardless of where the price goes.
That’s why a fixed “yield” is a misleading way to model dividends. A constant yield makes the payout silently track the price, baking price growth into the income. Real dividend investing is about a payout that rises on its own. The starting yield only sets the first year’s per-share dividend (price × yield); after that it grows by the dividend growth rate.
What reinvesting actually does
Reinvesting layers a second compounding loop on top of price growth. Take $10,000 in a stock yielding 3%, with the dividend growing 6%/yr, the price growing 5%/yr, and $2,400 added each year. Over 20 years, the reinvested version finishes well ahead of the take-the-cash version — not because the dividends are larger, but because each one bought shares that then paid their own dividends.
The mechanics are ordinary compound interest: the curve looks nearly flat for years, then bends sharply upward as reinvested income starts to dominate. Turn DRIP off and you watch those same dividends pile up as idle cash beside the share value — useful if you need to spend them, costly if you’re still building.
Yield on cost — the number to watch
Current yield (dividend ÷ today’s price) tells a new buyer what they’ll get. Yield on cost (current income ÷ what you invested) tells you what your past self bought, and it’s the honest scoreboard for dividend growth.
Yield on cost climbs over time: a 3% buy can pay double digits on cost two decades later — the per-share dividend grew, and DRIP kept adding shares.
Suppose you put in $10,000 and, after years of dividend growth and reinvestment, collect $900 a year. Your yield on cost is 9% — triple the 3% a new buyer sees — even though the stock still “yields 3%” on its current price. That gap is the whole point of the strategy, and it’s the headline stat in the calculator below.
Run your own numbers
$173,024
$46,566 in dividends · $5723 income in the final year
| Year | Value | Dividend |
|---|---|---|
| 1 | $13,392 | $372 |
| 5 | $29,972 | $864 |
| 9 | $52,803 | $1579 |
| 12 | $75,534 | $2322 |
| 16 | $116,131 | $3703 |
| 20 | $173,024 | $5723 |
- Yield on cost
- 9.9%final income / invested
- Final-year income
- $5723dividends, last year
- Total invested
- $58,000initial + contributions
- Shares
- 652.1DRIP + contributions
The standalone dividend & DRIP calculator runs the same projection — final value, total dividends paid, final-year income, share count, and yield on cost — with toggles for reinvestment, dividend growth, contributions, and tax.
What a smooth projection hides
Any projection at constant rates is a baseline, not a forecast. Real companies freeze, cut, and suspend dividends; prices don’t rise in a straight line. Three honest caveats:
- Inflation. Results are nominal. Convert the final value to today’s purchasing power with the inflation calculator.
- Total return vs income. If you reinvest, what you’ve actually earned is a total return — annualize it honestly with CAGR, not a simple average.
- Taxes. In a taxable account, dividend tax drags on compounding every year. See how marginal rates work in tax brackets, and prefer tax-advantaged accounts for dividend-heavy holdings where you can.
For investors aiming at financial independence, dividends are one path to the same destination as any other return — what matters is the compounding, the savings rate feeding it, and the time you give it.
Go deeper:
- Dividend & DRIP calculator — the standalone version of the calculator above.
- Compound interest: the most misunderstood formula in finance — why the curve bends late.
- ROI vs CAGR — measuring returns honestly once dividends are reinvested.
Educational content, not financial advice. Projections use constant assumed rates; real dividends and prices vary.