A dividend reinvestment plan, or DRIP, uses the dividends a stock or fund pays you to buy more shares of it, instead of sending you the cash. You own more shares each time a dividend arrives, and those shares pay dividends of their own. That loop is the whole idea. To see it with your own numbers, use the dividend reinvestment calculator.
How a DRIP works
Each time a holding pays a dividend, the plan puts that cash into new shares, often fractions of a share, so none of it sits idle. You don't place an order. It happens on or near the payment date.
There are two common setups, and the terms vary by provider:
- Broker DRIP. Your brokerage account holds the shares. When a dividend lands, the broker uses it to buy more of the same holding for you. You switch it on per holding or per account. Whether fractional shares are supported, and how the purchase is priced, depends on the broker.
- Company DRIP. The company, or a transfer agent acting for it, runs the plan. Your dividends buy shares directly through that agent. The IRS describes this as a plan that lets you choose to buy more shares of the corporation through an agent instead of receiving the dividends in cash. Rules, fees and any discounts are set by each plan, so read its terms.
Mutual funds and ETFs can do the same with their distributions. The IRS notes that most mutual funds let shareholders automatically reinvest distributions in more shares of the fund (Publication 550, retrieved October 5, 2026).
What reinvesting did for the S&P 500
The S&P 500's price return counts only the change in the index level. Its total return also counts the dividends. The gap between the two is what dividends contributed. The table compares them over four periods, in nominal terms, and shows what $10,000 grows to if dividends are reinvested versus not.
| Period | Total return (dividends reinvested) | Price return | Yearly difference (from dividends) | $10,000 with dividends reinvested | $10,000 price only |
|---|---|---|---|---|---|
| 10 years (2016–2025) | 14.7% | 12.8% | 1.8% | $39,339 | $33,492 |
| 20 years (2006–2025) | 10.9% | 8.9% | 2.0% | $79,205 | $54,839 |
| 30 years (1996–2025) | 10.3% | 8.4% | 1.9% | $187,103 | $111,141 |
| Since 1928 (1928–2025) | 10.0% | 6.3% | 3.7% | $115,701,364 | $3,876,281 |
"Not reinvested" here is the price-only series. It leaves out the cash dividends you would have received and spent or kept elsewhere, so it understates what a non-reinvesting investor ends up with. Taking dividends as cash changes the comparison.
Inflation changes the picture too. The same table in real terms:
| Period | Total return (dividends reinvested) | Price return | Yearly difference (from dividends) | $10,000 with dividends reinvested | $10,000 price only |
|---|---|---|---|---|---|
| 10 years (2016–2025) | 11.1% | 9.3% | 1.8% | $28,697 | $24,432 |
| 20 years (2006–2025) | 8.2% | 6.2% | 2.0% | $48,075 | $33,285 |
| 30 years (1996–2025) | 7.5% | 5.7% | 1.9% | $88,578 | $52,616 |
| Since 1928 (1928–2025) | 6.8% | 3.1% | 3.6% | $6,173,349 | $206,822 |
For decade-by-decade and rolling-window detail, see S&P 500 returns by decade.
Dividend yield, explained
Dividend yield is the annual dividend per share divided by the share price. It tells you how much cash a holding pays each year relative to what one share costs. The example below uses round hypothetical numbers, not a real fund, and also shows the average yearly gap between total and price return in the S&P 500 data.
Illustrative, not a real fund: a $100 share paying $3 a year has a 3% dividend yield. If the price rises to $120 and the payout stays $3, the yield falls to 2.5%.
In the S&P 500 data, dividends added about 1.9% a year to the return over the last 30 years (1996–2025): total return minus price return, annualized. Source: Damodaran, NYU Stern (S&P 500 total return, bonds, gold, T-bills, CPI), 1928–2025.
Yield moves with the price. If the price falls and the dividend stays the same, the yield rises. A high yield alone says nothing about whether the dividend is safe or the holding is a good one.
Taxes on reinvested dividends
This section covers a regular taxable account. We don't compute anyone's tax here.
Reinvesting doesn't make dividends tax-free. The IRS says that if you use your dividends to buy more stock at a price equal to its fair market value, you must still report the dividends as income (Publication 550, retrieved October 5, 2026).
Reinvested shares also get a cost basis, which matters when you sell. For mutual fund shares, the IRS states that the original cost basis of shares acquired by reinvesting distributions is the amount of the distributions used to buy each full or fractional share (Publication 550, retrieved October 5, 2026). Each reinvestment is a separate purchase, and the holding period of each new share begins the day after it was purchased.
Dividends are also split into two kinds. Per IRS Topic No. 404 (retrieved October 5, 2026), ordinary dividends are included in ordinary income, while qualified dividends are those that qualify to be taxed at lower capital gain rates. Which kind you receive, and the rates that apply to you, are not calculated here. A tax professional can answer questions about your case.
One timing rule from the same publication: a fund dividend declared in October, November or December and paid in January is treated as received on December 31, and is reported in the year it was declared.
When not to reinvest
Reinvesting is a default, not a rule. Some situations where people turn it off:
- You need the income. Cash dividends can cover spending. Reinvesting means selling shares later to get the same cash.
- You are rebalancing. Automatic purchases add to a holding whether or not it is already larger than you want. Taking cash lets you send it to a different holding.
- Concentration. If one holding is already a big share of your portfolio, reinvesting makes it bigger.
- Taxable cash flow. In a taxable account you owe tax on the dividend even though you never received the cash, so you need money from somewhere else to pay it.
- Tracking. Many small purchases create many tax lots. Some people prefer fewer, larger purchases for simpler records.
None of these makes reinvesting wrong or right. They are the trade-offs. For how uncertainty around returns and dividends changes the picture, see the Monte Carlo simulation guide.
Where to go next
- Run your own numbers: dividend reinvestment calculator
- Model a dividend-focused fund: SCHD calculator
- Model a single S&P 500 fund: VOO calculator
- Project an S&P 500 balance: S&P 500 investment calculator
- Where to hold an index fund and what it costs: how to invest in the S&P 500
- Line up fund fees: S&P 500 index fund comparison
How we calculate: methodology and sources.
Past returns don't guarantee future results. This article is educational and is not financial advice or tax advice.
Source: Damodaran, NYU Stern (S&P 500 total return, bonds, gold, T-bills, CPI), 1928–2025.
