A dividend is not a separate free return
A dividend distribution and the value of the underlying business are connected. A projection that adds a high dividend yield to an unrealistic constant price-growth assumption can overstate total return. Enter dividend growth and price growth deliberately.
Follow the share count
Reinvested cash buys additional shares. Those shares can receive later distributions. The model calculates that process monthly rather than simply adding a dividend percentage to a compound-interest formula.
Remember the tax drag
In a taxable account, choosing to reinvest generally does not make a taxable dividend disappear. This calculator subtracts the chosen dividend tax before purchasing additional shares. Tax-advantaged account rules may differ.
Compare with taking cash
Switch DRIP off to see the portfolio value and cumulative withdrawn dividends separately. Do not compare only the ending balances and forget the cash already received. Neither setting is inherently right; it depends on whether you need current income.
Sources and further reading
This guide explains a tool and its assumptions. It is not personalized financial, tax, or legal advice.
Put the explanation to work.
Change the assumptions, compare the results, and export the numbers without creating an account.
Open DividendPathCalc