Dividend growth compounds twice: payouts rise, and reinvested dividends buy more shares. Project what your portfolio's income looks like in N years.
Yield on cost — future income divided by today's portfolio — shows the effect: a 3% yield growing 5% yearly with reinvestment roughly doubles income inside a decade.
The model isolates income and ignores share-price movement and dividend taxes; in taxable accounts, taxes on each distribution slow the compounding.
Dividend growth is not guaranteed, and the record of cuts is the part projections leave out. Payouts fell sharply across the market in 2008–09 and again in 2020, and a company under pressure will usually cut the dividend before it cuts investment. A model compounding 5% a year for a decade is describing the good case.
Yield and growth also trade against each other. A 6% yield is usually a business with little left worth reinvesting in; a 1.5% yield growing 12% a year overtakes it inside a decade and keeps going. Which is better depends entirely on whether the income is needed now or later.
Where the shares are held changes the compounding as much as the growth rate does. In a tax-sheltered account every distribution reinvests in full; in a taxable one the tax is taken first, and for a foreign holding a withholding tax may be deducted before it ever reaches you, sometimes reclaimable and often not.
Frequently asked questions
What is yield on cost?
The future annual dividend income divided by what you invested today. Growing payouts plus reinvestment push it well above the market yield over the years — the core of the dividend-growth strategy.
How fast do dividends grow?
Established dividend growers have historically raised payouts around 5–10% a year, but growth is limited by earnings: payout ratios near 100% leave no room. Diversify rather than counting on any single streak.
Should I reinvest my dividends?
Reinvestment buys more shares that themselves pay dividends — compounding income noticeably faster than taking the cash. In taxable accounts, tax on each distribution slows this somewhat.