A Dividend Reinvestment Plan (DRIP) automatically uses your dividend payments to purchase additional shares of the same stock or fund, rather than paying them out as cash. This creates a compounding loop: more shares generate more dividends, which buy more shares, which generate even more dividends. Over decades, this snowball effect can dramatically increase both your total share count and your annual dividend income.

The calculator simulates this process year by year. Each year, dividends are calculated based on your current share count and dividend per share. Those dividends are then reinvested at the current share price to buy additional fractional shares. Both the dividend per share and the stock price grow at their respective annual rates, reflecting the reality that successful companies tend to increase dividends and appreciate in price over time.

For example, a $10,000 investment in a stock priced at $50 per share with a $2.00 annual dividend (4% yield) growing at 5% per year, combined with 4% annual price appreciation over 10 years, would grow to approximately $22,336. Your share count would increase from 200 to approximately 268 shares through reinvested dividends alone, and your annual dividend income would grow from $400 to approximately $876 per year.