Why yield-on-cost is the only number that matters for DRIP
The stock's current yield tells you what a new buyer earns today. Your yield-on-cost tells you what you earn on the dollars you originally invested. After 25 years of dividend growth at 6%, a stock you bought at a 3.2% yield is paying you 13% on your original dollars — even if the new buyer still gets 3.2%. That divergence is the entire point of DRIP.
FAQ
Does DRIP create a tax event every year even if I don't sell?
In a taxable account, yes — the dividend is taxable income in the year paid, even if it's automatically reinvested. The reinvested shares have a new cost basis equal to the dividend amount. In an IRA, no annual tax. In a Roth, no tax ever. This calculator models all three.
Why does dividend growth matter more than starting yield?
Because the same dollar of dividend compounds. A 3% starting yield with 8% dividend growth overtakes a 5% starting yield with 0% growth by year 12. The growth rate is what creates the yield-on-cost divergence; the starting yield is just the initial deposit.
What about dividend cuts during recessions?
This calculator assumes constant growth. Real dividend payers cut dividends in recessions — sometimes 30–50% (banks in 2008, energy in 2020). The "dividend aristocrats" — companies with 25+ years of consecutive increases — are the safer bet, but even they cut occasionally. The model is illustrative.
Methodology
Each year, the per-share dividend grows by divG%, the share price grows by prG%. The number of shares owned grows by (annual dividend / current share price) when dividends are reinvested. In a taxable account, the dividend is taxed at the user's rate; in IRA, no tax; in Roth, no tax. Yield-on-cost = (current annual dividend per share × shares owned) / original investment. Source: standard DRIP math; growth rates are user assumptions, not forecasts.