The miracle of compounding interest is where you gain interest in an investment, be it a savings account or stock holding, and then reinvest it to gain even more interest the next time around. Dividend Reinvestment is one way to achieve this. The more frequent dividends are issued and reinvested, the higher your rate of return. So we have provided calculators to match the three most common dividend schedules. One that compounds annually, one that compounds quarterly, and one that compounds monthly.
A field of investing, called DRIP investing utilizes automatic dividend reinvestment plans which are programs offered either by the company in which you have invested, or your broker, to automatically reinvest dividends into the issuing stock. You can of course reinvest manually, which is required if you want to diversify into a different stock with your dividend earnings, but if you just want more of the original stock, a DRIP plan is best. Just remember, even though you're reinvesting the dividends automatically, they are still taxable earnings.
- Annually Compounded Dividend Reinvestment Calculator
- Quarterly Compounded Dividend Reinvestment Calculator
- Monthly Compounded Dividend Reinvestment Calculator
You will find that the more frequently compounded your investment is, the faster it will increase in value. With otherwise identical stocks that yield 5% and have the same share price, over the course of 30 years you will earn more than 10% more with one that compounds monthly than one that compounds quarterly, and more than 10% more with one that compounds quarterly than one that compounds annually. As such if you can find a stock with a more frequent dividend it is worthwhile to accept a slightly lower yield than a stock with a higher dividend, but one that only pays out once a year.