As an investor, you pay close attention to the price of the stocks or funds in your portfolio. But if dividend stocks are a significant part of your portfolio, you know that capital gains are only one factor that influences your portfolio’s growth. Dividends and specifically your ability to reinvest those dividends play a significant role as well.
And as you know, the variables affecting how much those dividends pay change over time. Sometimes companies raise or cut the amount of their dividend. Dividend yields move up and down with share prices. The amount that you contribute may increase or decrease over time. And your dividend tax rate may change as well.
That’s where a dividend calculator can be such a useful tool. It allows you to estimate the future growth of your dividend-paying stocks based on the variables you know today. And you can continue to come back to the calculator to see how future changes impact that growth. You can also use the dividend calculator before buying a stock as part of your due diligence.
What is a Dividend Reinvestment Plan (DRIP)?
A dividend reinvestment plan (DRIP) is a long-term investment strategy in which investors reinvest their dividend payout into the company to buy more shares. If the company regularly pays dividends (and better if they increase them), this amount will increase over time as will your total return.
Plus, reinvesting dividends allows the power of compounding to be put to work. Owning more shares increases the amount of your dividend payment. And the larger the dividend payment the more shares you can add in addition to whatever capital you add. Over time, this creates a wealth-building cycle and it can smooth out times of stock price depreciation.
Should Every Investor Use a Dividend Reinvestment Plan?
As mentioned above a DRIP is a long-term investment strategy that assumes an investor does not need the income generated by dividends right away. If you’re an investor that is counting on dividend income as part of your annual income to meet expenses, a DRIP may not be right for you. Or you may only choose to use a DRIP for certain stocks.
This is another example of where a dividend calculator can offer a real benefit. You can calculate the payout for different stocks to decide which ones you may want to use as reinvestments based on your financial goals and investment objectives.
How to Use the Dividend Calculator?
Most of the variables are self-explanatory, but here is a quick refresher of some key points:
Individual Stock or Portfolio – You can choose to enter data for an individual holding. Or, you can choose to make a calculation for an entire portfolio. For example, some investors will have an investment account specifically for dividend investments.
Distribution Frequency – Most dividend-paying stocks issue dividends on a quarterly basis. However, there are some instances where a company pays a monthly dividend or an annual dividend. This information is easily attainable.
DRIP – Most dividend-paying stocks offer the ability to reinvest through a DRIP. However, there are some that do not. Like the distribution frequency this information is easily attainable.
Annual Contribution – This is the amount that you will be adding to the portfolio. If you are making this calculation for an employer-sponsored tax-deferred account (e.g. 401k), you should include the total contribution from both you and your employer.
Dividend Tax Rate – Dividends can be either qualified or non-qualified. The tax rate on non-qualified dividends is the same as your regular taxable income. Qualified dividends are tax-free for individuals in the 10%, 12%, and 22% tax brackets. However, if you’re in the 22%, 24%, 32%, or 35% tax bracket, you will be subject to a taxable rate of 15%. And individuals in the 35% or 37% tax brackets will have a dividend tax rate of 20%.
Dividend Yield – This reflects the amount (in dollars) of a company’s current annual dividend per share divided by its current stock price. Because this number is based on current numbers, a dividend yield moves up and down frequently which is why it’s important to revisit the dividend calculator on a regular basis.
Expected Annual Dividend Amount Increase % (per year) – Many investors can see the amount a company has increased its dividend in one year (if any). If the company has a solid history of increasing its dividend, you may want to use their three-year average to provide a realistic barometer of future growth.
Expected Annual Share Price Appreciation % (per year): Share price appreciation or depreciation is a fluid number. Investors should use a conservative number based on the average of most dividend-paying stocks.
Years Invested - This is measured from the present day to the day you plan on needing the money. One of the benefits of using a dividend calculator is you can get an idea of how your investment may perform over different periods of time.
Limitations of a Dividend Calculator
As with any calculation tool, a dividend calculator is only as good as the data that is entered into it. So you should take care to be as accurate as possible. Also, the calculator is only based on the data you’re entering today. If the market moves sharply in one direction or another it would be a good idea to run the calculator again, particularly if the amount of your contribution or investment timeline has changed.