Dividend Reinvestment Plan (DRIP): how it actually compounds
Your dividend buys more shares instead of landing in your account, so next year's payout is bigger too.
By default, a company’s dividend lands in your bank or demat-linked account as cash. A Dividend Reinvestment Plan (DRIP) redirects that same payout into buying more shares of the same stock instead, automatically, at the time of payout. Nothing about the dividend itself changes; what changes is what happens to it the moment it’s paid.
What a DRIP actually does
Without a DRIP, your share count stays fixed and each year’s dividend is paid on that same fixed count, cash in, cash out. With a DRIP, this year’s dividend buys additional shares (including fractional ones, since dividend payouts rarely divide evenly into whole shares), so next year’s dividend is paid on a slightly larger holding than before. The effect compounds the same way reinvested interest does: each cycle grows the base the next cycle is calculated on.
The compounding, in numbers
₹5,00,000 invested at a ₹450 share price buys 1,111.11 shares, this site’s own Dividend Yield Calculator defaults. At a ₹12 per-share annual dividend, that’s a 2.67% yield and a ₹13,333 year-one payout. Reinvested at the same ₹450 price, that payout buys 29.63 more shares, taking the holding to 1,140.74 shares. If the price and dividend per share stay exactly the same the following year, the payout on that larger holding is ₹13,689, about ₹356 more than year one, purely from reinvestment, with no price appreciation or dividend growth assumed at all.
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That ₹356 looks small in isolation, but it compounds the same way any reinvested return does: each year’s slightly larger share count earns a slightly larger dividend, which buys a slightly larger number of new shares again. Over a multi-decade holding period, and combined with any actual dividend growth the company delivers, the gap between a DRIP and taking the cash widens well beyond what a single year suggests.
How this differs from a SIP
Both a DRIP and a SIP grow your share count over time, which makes them easy to conflate, but the source of the money is different. A SIP invests fresh capital you contribute every month, regardless of whether the fund paid anything out. A DRIP only ever reinvests money the stock itself already generated as a dividend, you contribute nothing extra. A DRIP also can’t run on a stock that pays no dividend at all, while a SIP works on any fund regardless of its payout policy.
The trade-offs
A DRIP buys shares automatically at whatever the price happens to be on the payout date, with no choice in the matter, unlike manually reinvesting where you decide the timing and price yourself. It also still counts as income for tax purposes in India even though you never touched the cash: reinvested or not, the dividend is added to your total income and taxed at your slab rate in the year it’s paid.
All figures are indicative and for educational purposes only, not financial advice.
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