What Is a Dividend Reinvestment Calculator
A dividend calculator takes inputs like initial portfolio value, annual contributions, dividend yield, expected capital growth, and dividend growth rate, then provides calculations and projections on your portfolio's performance over a specified period.
This differs from a standard compound interest calculator as it considers specific details related to dividend stocks, such as annual dividend yield, compound dividend growth rate, payout frequency, and dividend tax rate. It also provides additional dividend-specific metrics, including yield on cost, annual dividend earnings, and lifetime dividend earnings.
How To Use the Infinity Calculator Dividend Calculator
Our dividend reinvestment calculator is simple to use, requiring only basic information about your dividend portfolio to get started.
Step 1: Enter Dividend Portfolio Information
First, you need to enter the requested information into our calculator. We will provide a brief description of all the requested information below:
Starting Principal: The starting principal is the current value of the shares in your dividend portfolio. For example, if you have a dividend portfolio that has $150,000 in stocks and $25,000 in cash, you would enter $150,000 as your starting principal.
Annual Contribution: The annual contribution is the amount of cash you will invest in dividend stocks each year in your portfolio. We don't count the cash that you add to your dividend portfolio that is left uninvested. For example, if you add $20,000 into your portfolio each year but only invest $15,000 of it, your annual contribution would be $15,000. Our calculator assumes you invest your contribution by dollar cost averaging into the market once at the end of each year.
Annual Dividend Yield: The annual dividend yield is the percentage of the dividend stock's value you receive back each year in the form of dividend payments. For example, if you had a stock with a value of $10 that makes a dividend payment of $1 per year, your dividend yield would be (1/10)*100=10%.
Dividend Growth Rate: The dividend growth rate is the compounded percentage increase of the dividends paid per share of your portfolio over the last five years. You can find this number on most stock analysis websites, but we always get our dividend growth rate information from Seeking Alpha.
Annual Share Price Growth: Annual share price growth is the expected capital gains per year expressed in a percentage. You can use a historical figure as a baseline for your portfolio or the market average for your specific sector. When in doubt, we like to use the non-inflation-adjusted average market return statistic of 8%.
Number of Years: The number of years you want our calculator to model your portfolio performance.
Maximum Dividend Yield: The maximum dividend yield you want our calculator to allow. This only comes into play when your dividend growth rate is set higher than your annual share price growth rate.
Reinvest Dividends: This toggle tells our dividend calculator whether you want to reinvest dividends through a program like DRIP or withdraw them for income.
Payout Frequency: The payout frequency or dividend distribution frequency is how often your dividend stocks pay out dividends. Most stocks pay quarterly, but some pay monthly, semiannually, and annually. This affects how often your portfolio will compound. Usually, a more frequent dividend payment will allow your portfolio to grow quicker than one with a less frequent payment when all other factors are the same.
Step 2: Enter Dividend Tax Information
Next, enter information related to how dividends earned by your portfolio will be taxed. If your portfolio is in a tax-sheltered account like a 401(k), TFSA, or RRSP, you can leave this section blank.
Dividend Tax Rate: The average tax rate you will be charged on your dividend income. This is different than your marginal tax rate. You can find your average tax rate using a tax calculator for your region.
Tax Free Dividend Income Allowed: The amount of dividends you can earn before you are taxed. For example, if you have an exemption of $10,000 and you earn $20,000 in annual dividend income, we will only calculate taxes on $20,000-$10,000=$10,000 of income.
Step 3: Analyze Data
Once you have entered your dividend portfolio information into the dividend calculator, you will be presented with information related to your portfolio along with a chart to visualize this data. We will provide a brief description of all the information below:
Ending Balance: The ending balance is your portfolio value at the end of your simulation. This value accounts for all capital gains, reinvested dividends, and annual contributions.
Total Return: The total return is the percentage increase between your ending balance and the amount of cash you contributed to your portfolio.
Average Annual Return: The average annual return is calculated by dividing the total return by the number of years over the term of your simulated portfolio. It gives you a good understanding of the expected percentage return you can expect to get based on your inputted data.
Ending Annual Dividend Income: The annual dividend income you should expect to receive after your investment period. This takes into account your dividend growth rate and dividend reinvestment.
Total Dividend Payments: Total dividend payments are the total amount of dividends earned during your investment period.
Yield on Cost: Yield on cost is calculated by dividing your total annual dividend income at the end of the investment period by your total cash contributions. It is typically higher than the current dividend yield, assuming the portfolio has a positive dividend growth rate.
What Is a Dividend Yield and Why Is It Important
A "dividend yield" is the percentage of the stock's price that an investor is paid back in cash or stock in a year. Dividends are paid out based on a stock's dividend payment frequency, which is usually quarterly but can also be weekly, monthly, semiannually, and annually.
You can calculate a stock's dividend yield if you have the current stock price and the annual dividend payout. The dividend yield formula is as follows:
((annual dividend payout in $)/(current share price))*100
For example, if you had a stock that was currently priced at $150 and paid out $3 in annual dividends, the dividend yield would be (3/150) * 100 = 2%.
Dividend yields are important because they represent the income investors get from holding a stock, offering a steady cash flow. They also help assess a company's financial health, as stable or growing dividends usually indicate strength. Dividend yields contribute to total returns, help gauge a stock's value, and show management's confidence in the company's future.
High dividend yields can also be a warning sign, as they may indicate a recent significant drop in share price or a potentially higher-risk investment.
What Is a Dividend Growth Rate and Why Is It Important
The dividend growth rate of a stock represents the speed at which the company increases its dividend payments over time, expressed as a percentage. It reflects the company's dedication to rewarding shareholders. A strong dividend growth rate is often one of the best indicators of a quality dividend stock. Top dividend stocks typically have a long history of consistent dividend payments along with a healthy growth rate.
For example, if a dividend stock paid $1.25 per share last year and increased its dividend to $1.31 this year, the one-year dividend growth rate would be calculated as (1.31/1.25)*100, resulting in a growth rate of 4.8%.
The yield on cost of your portfolio is significantly influenced by the dividend growth rate of the stocks you hold. A higher dividend growth rate will increase your yield on cost, thereby providing a greater return on your initial investment.
A well-known example of the power of this principle is Warren Buffett's investment in Coca-Cola (KO). According to Yahoo, his investment now generates an impressive yield on cost of 59.7%. This means that he receives almost 60% of his initial investment back in dividends every single year.
What Are the Benefits of Owning Dividend Stocks
Dividend-paying stocks pay out cash periodically throughout the year. This is beneficial to investors who are looking to generate cash flow from their portfolio rather than just capital gains. Dividend stocks provide cash flow without requiring you to sell shares. This is particularly advantageous during market downturns, as it allows you to generate income without having to sell shares when their prices are at their lowest.
According to Investopedia, dividend stocks also tend to perform better than growth stocks during a recession due to the constant cash returns they provide to investors.
Why Is It Important To Reinvest Dividends
Reinvesting dividends manually or through a dividend reinvestment plan is important because it affects how much your portfolio value will compound over time. For example, the S&P500 has returned 10.628% over the last 100 years if you reinvest dividends and only 6.629% if you don't. This means that dividends account for 40% of the index's total gain over the last 100 years, as per ThatTradeSwing.
If you invested in the S&P500 ten years ago using two different strategies, one reinvesting dividends and the other not, the difference in portfolio value would be quite substantial. The portfolio with reinvested dividends would now be worth $288,000, while the one without reinvesting would only be worth $193,000. This creates a significant difference of $95,000 in value in only ten years.