How Dividend Reinvestment (DRIP) Works
DRIP Steps
- You hold an initial number of shares (e.g. 100 shares).
- Each year, you receive dividends (e.g. 3 EUR per share = 300 EUR).
- Dividends are automatically reinvested at the current price (e.g. 50 EUR), buying 6 new shares.
- Next year, you earn dividends on 106 shares. The snowball effect begins.
20-Year Example
100 shares, 3 EUR dividend, reinvestment price 50 EUR. Annual growth rate: 3/50 = 6%. Formula: Shares(n) = 100 x 1.06^n
- Year 1: 100 x 1.06 = 106.00 shares
- Year 5: 100 x 1.06^5 = 133.82 shares
- Year 10: 100 x 1.06^10 = 179.08 shares
- Year 20: 100 x 1.06^20 = 320.71 shares
Without reinvestment, you would still hold 100 shares. DRIP more than tripled your position through compounding.