Dividend Reinvestment (DRIP): How Reinvesting Builds Income
A dividend can be paid out as cash or used to buy more shares. Reinvesting turns each distribution into another ownership stake, which can increase future share count and income over time.
What a DRIP changes
A Dividend Reinvestment Plan uses a distribution to buy additional shares instead of paying cash. If 100 shares receive $0.50 each, the $50 distribution buys two shares at a $25 share price. The next payment can then be based on 102 shares before other changes.
The important variable is share count. More shares can produce more distribution dollars to reinvest, while distribution growth per share can add a second source of growth.
The compounding loop
- A holding pays a distribution.
- The distribution buys shares, depending on price and fractional-share support.
- New shares join the future income base.
- Fresh contributions add another source of share accumulation.
Worked example: 250 shares over 15 years
Assume 250 shares priced at $100, a 3.5% starting yield, 5% annual distribution growth, and $6,000 of annual fresh contributions. With a constant share price and annual reinvestment, the first-year distribution is $875 and the final-year illustration reaches approximately 1,878 shares and $13,011 of annual income.
- Year 1: approximately 319 shares and $1,116 annual income
- Year 5: approximately 628 shares and $2,670 annual income
- Year 10: approximately 1,131 shares and $6,142 annual income
- Year 15: approximately 1,878 shares and $13,011 annual income
These figures are illustrations, not forecasts. Real prices, distributions, taxes, fees, and rounding can change the result.
Cash income versus income growth
Taking distributions as cash may fit a spending goal. Reinvesting may fit an accumulation period because the cash remains invested. Neither choice is automatically superior; compare the goal, account type, taxes, trading costs, and sustainability of the distribution. Total return includes both price change and distributions.
What the model leaves out
- Changing share prices can mean each distribution buys more or fewer shares.
- Companies and funds can raise, reduce, suspend, or classify distributions differently.
- Canadian TFSA, RRSP, and non-registered accounts can have different tax outcomes.
- Fees and fractional-share rules affect how much is actually reinvested.
Frequently asked questions
- What does DRIP stand for?
- DRIP stands for Dividend Reinvestment Plan. Instead of receiving a dividend in cash, a DRIP uses it to buy additional shares of the same stock or fund. Those shares can then receive future distributions.
- Does reinvesting dividends guarantee higher returns?
- No. Reinvestment increases exposure to the investment, but share prices, distributions, taxes, and company results can change. A DRIP models a cash-flow choice, not a guarantee of profit.
- Are reinvested dividends taxable in Canada?
- A reinvested distribution can still be taxable income in a non-registered account, even though no cash was withdrawn. Tax treatment depends on the account, security, and distribution type. This model does not calculate taxes.
- What does the WealthFunnel DRIP calculator assume?
- It holds the share price constant so the effect of reinvestment, yield, dividend growth, and fresh contributions is easier to see. Use a range of assumptions rather than treating one projection as a forecast.
Use the dividend DRIP calculator to model share count and income. Related: compound versus simple interest and investment fees.