Why yield on cost reaches 12.1% while a new buyer still gets 3%
A dividend reinvestment plan automatically uses each cash dividend to buy more shares of the same investment, often commission-free and in fractional amounts. Your position grows with every payout without any action from you, and the new shares earn dividends of their own — that is the compounding engine this calculator models. The share count and the dividend income therefore grow together, payout by payout.
Yield on cost is your annual dividend income divided by the amount you invested, rather than the current market price. It rises when the dividend per share grows, because your cost is fixed, and again when each reinvested payout adds shares to the income side of the ratio. It therefore climbs faster than the market yield the longer you hold and the more the dividend grows. In the twenty-year example below it reaches about 12.1% — well above the 3% a new buyer would get today, because the dividend has grown while your cost stayed fixed.
That gap is the case for having held. It is not a case for holding on: yield on cost is a useful progress meter for an income plan but says nothing about whether holding remains better than the alternatives available today. A 12.1% yield on cost is not a reason to keep a position you would not buy again at today’s price.
Twenty years with the dividends reinvested, and with them banked
You invest $10,000 at $50 per share (200 shares) with a 3% dividend yield, 7% price growth, and 5% dividend growth, reinvesting every annual dividend for 20 years. The first-year dividend is 200 × $1.50 = $300. Reinvested payouts lift the share count to about 319 shares, and the position ends near $61,700 — versus about $48,600 (final value plus cash kept) if every dividend had been taken as cash, a reinvestment advantage of roughly $13,000. The table runs that one scenario twice — same holding, same yield, same price growth, the only difference being where each payout goes. The cash path is scored honestly: every dividend it takes is kept, not spent and not invested elsewhere.
Reinvesting every dividend against taking every dividend as cash, over the same 20 years.| After 20 years | Dividends reinvested | Dividends taken as cash |
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| Shares held at year 20 | 318.71 | 200 |
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| Portfolio value | $61,666 | $38,697 |
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| Dividend cash collected on the way | $0 | $9,920 |
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| Total wealth (portfolio + cash) | $61,666 | $48,617 |
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| Annual dividend income in year 20 | $1,208 | $758 |
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| Yield on cost | 12.08% | 7.58% |
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| Annualized return | 9.52% | 8.23% |
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Reinvesting is $13,049 ahead on total wealth, and the income gap is the sharper one: $1,208 a year against $758, because the cash path never grew its share count. That is the argument for a DRIP while you are accumulating — and the argument against it once you actually need the income to live on.
None of that makes reinvesting automatically right. Reinvesting usually produces the larger final value because of compounding, but taking the cash is rational when you need income, want to diversify away from the position, or doubt the investment. The DRIP vs Cash mode scores both paths rather than declaring a winner: the cash path keeps its dividends, and the advantage above is a difference in total wealth, not a recommendation.
How many of your shares were bought by dividends rather than cash
Only $10,000 of your own money ever entered this position. The rest of the share count was bought by the dividends, and both blocks are valued at the same $193.48 year-20 price.
The year-20 balance split into the shares bought with cash and the shares bought by reinvested dividends.| Where the shares came from | Shares | Cash that bought them | Value at year 20 |
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| The shares you boughtYour own money, plus 20 years of price growth | 200 | $10,000 | $38,697 |
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| The shares the dividends boughtDividends, not new money — plus growth on them | 118.71 | $13,143 | $22,969 |
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| Total at year 20Of which only $10,000 was your own money | 318.71 | $23,143 | $61,666 |
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37.2% of the ending balance sits in shares no new money ever bought. The middle row is also the row that matters at tax time: $13,143 of dividends were received and reinvested, so in a taxable account that is income to declare along the way — and the same amount added to your cost basis at sale.
In a regular taxable account, many countries tax dividends in the year they are paid even if you never see the cash — the reinvestment does not defer the tax, so the drag compounds alongside the shares. In tax-advantaged accounts (pensions, ISAs, 401(k)-type wrappers and similar), dividends usually compound without immediate tax. Rules differ by country, account, and dividend type, so verify your own treatment. The Net DRIP After Tax mode applies your annual tax-exempt allowance pro-rata to each payout and taxes the rest at a single flat rate, which makes it a flat-rate estimate rather than a tax calculation — no brackets, no withholding, and no qualified-versus-ordinary split.
A halved dividend in year 11 costs a tenth of the balance and much more of the income
Dividends are declared, not guaranteed. Below, the payout is cut once at the start of year 11 — from the $2.44 per share it had grown to — and then resumes growing at the same 5%. Everything else is unchanged.
Year-20 shares, value and income after a dividend cut of four different sizes in year 11.| Cut in year 11 | Dividend per share after it | Shares at year 20 | Value at year 20 | Income in year 20 |
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| No cut | $2.44 | 318.71 | $61,666 | $1,208 |
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| Cut 25% | $1.83 | 302.44 | $58,517 | $860 |
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| Cut 50% | $1.22 | 286.92 | $55,514 | $544 |
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| Suspended | $0 | 258 | $49,919 | $0 |
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A halved dividend costs $6,152 of the final balance — about a tenth — but takes the year-20 income from $1,208 to $544, a fall of 55%, because a smaller dividend also stops buying shares. The balance column is the optimistic read: this model holds price growth at 7% throughout, whereas a real cut usually arrives with a falling share price, so treat these as the floor of the damage rather than the whole of it.
The model cannot produce that cut on its own; a steady-growth projection has to have one imposed on it, the way the table above does. Nor can it capture volatility: the share price here compounds smoothly at the monthly equivalent of your annual growth rate and every payout is reinvested at that month’s price, whereas real reinvestments land at real market prices above and below it. An unusually high starting yield is the warning the model will not give you. Yield rises when the price falls, so a double-digit figure often signals that the market expects a cut or sees elevated risk, and chasing the highest yield frequently means buying the weakest businesses. The calculator flags double-digit yields for that reason, and the comparison mode never declares the higher-yield option better on yield alone.
Which of the six modes answers your question, and what none of them will tell you
DRIP Projection gives you the share count and balance. Switch to DRIP vs Cash to see exactly what reinvesting is worth in dollars against simply taking the payouts, or to Dividend Goal to work backward from a target monthly income to the portfolio size and share count you would need. If you are modeling a taxable account, read Net DRIP After Tax rather than the headline projection. Compare Two Investments runs the whole engine twice, side by side.
Every mode runs that one engine, so the same assumptions apply everywhere. Your dividend yield converts to a per-share dividend at the starting price, and the dividend per share then grows once per year at your dividend growth rate. Annualized return treats all invested money as committed for the whole period, so it is approximate whenever contributions exist — a money-weighted IRR would differ.
You can model a specific stock or fund — SCHD, JEPQ, an S&P 500 tracker — using its own numbers: its current price and dividend yield, plus your own assumed dividend growth and price growth rates. The calculator does not pull live data for any specific ticker; you supply the assumptions, and it projects the compounding from there, which is why the two-investment comparison tests assumptions rather than tickers. Regular contributions sit on top of the reinvested dividends: set a monthly, quarterly, or annual contribution amount alongside the dividend reinvestment, and the projection, including the Excel export, includes both together. Switch to GBP, EUR, INR, CAD, AUD, JPY, SGD, AED, or CHF and every figure, the workbook included, displays in that currency. Payout frequency stops at monthly, quarterly, semiannual, and annual: a small number of funds pay weekly or even daily, and monthly is the closest approximation available here, since the difference in compounding effect at that frequency is small.
What none of the six modes will do is judge the investment: the calculator does not measure risk, dividend safety, valuation, or liquidity, and it never recommends any security. This is a projection, not a forecast. For general growth from contributions without the dividend mechanics, use the investment calculator; for plain compounding, the compound interest calculator.
Read the guide
For how compounding works when returns are reinvested rather than taken as cash, see How Compound Interest Works With Regular Contributions.