Compound Growth
Compound Interest with Dividends: Why DRIP Changes Everything
Most calculators assume 7% total return. But capital growth ≠ dividends. They compound differently.
The Two Engines
| Engine | Source | Compounding | Tax Treatment |
|---|---|---|---|
| Capital Growth | Price appreciation | Automatic (price × shares) | Deferred until sale |
| Dividends | Cash payouts | Only if reinvested (DRIP) | Taxed annually (usually) |
The 20-Year Gap (€10k, 5% growth, 3% yield, €200/mo)
| Scenario | Final Value | Growth | Dividends Received |
|---|---|---|---|
| No DRIP (cash out dividends) | €98,400 | €54,200 | €34,600 (spent) |
| Full DRIP | €132,800 | €71,500 | €51,300 (reinvested) |
| Difference | +€34,400 |
35% more wealth just from reinvesting dividends.
When DRIP Hurts
- High-dividend stocks in taxable account (tax drag 0.5–1%/yr)
- You need the income (retirement)
- Dividends are qualified vs. ordinary — check your jurisdiction
The Real-World Compromise
- Tax-advantaged accounts: Full DRIP always
- Taxable accounts: DRIP growth-oriented funds (low yield); take cash from high-yield
- ETFs: Most auto-reinvest internally (accumulating share classes) — zero effort
Model it yourself
Separate growth, yield, DRIP, and payout frequency
Our Compound Interest Calculator separates capital growth, dividend yield, DRIP on/off, and payout frequency (monthly/quarterly/annual). Free, no login.
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