Dividend snowballs and DRIP: How reinvesting dividends can build your portfolio

Dividend snowball

Dividends can be a great way of supplementing your existing income, but how about using them to build your portfolio faster? Dividend growth investing is one of the strategies that a lot of investors opt for, allowing them to take advantage of a compounding effect—most often described as the dividend snowball. 

In general, stocks (usually ASX) and managed funds will offer to deposit your dividends directly into your bank account or brokerage platform cash balance. Alternatively, some will offer a DRIP option.

What is DRIP?

DRIP stands for Dividend Reinvestment Plan. It's a program offered by many companies and brokerages that allows investors to automatically reinvest their dividends into additional shares of the stock, often without any transaction fees—although keep in mind that you’ll still need to pay tax on those dividends. 

This makes the process of reinvesting dividends seamless and efficient, allowing you to take full advantage of the compounding effect without lifting a finger. 

What is a dividend snowball?

When you invest in dividend-paying stocks, you receive periodic payments from the company. Instead of cashing out these dividends, you reinvest them to purchase additional shares. Over time, the number of shares you own—and consequently, the dividends you receive—increases, creating a compounding effect that can significantly boost your portfolio's value. 

Investors generally describe this as a ‘dividend snowball’. It starts small but gathers more snow (dividends) as it descends, growing larger and larger. Of course, the difference is that it’ll ascend. Here’s a handy way of visualising this exponential growth when starting with $10,000:

Dividend growth graph for investment
  • 5 years: The investment grows to approximately $16,105.
  • 10 years: The investment increases to around $25,937.
  • 15 years: The original investment has more than quadrupled at $41,772.
  • 20 years: The investment grows to approximately $67,275.
  • 25 years: The investment reaches around $108,367.
  • 30 years: The investment skyrockets to about $174,494.

The magic behind the dividend snowball is the power of compounding. When you reinvest your dividends, you're essentially earning "interest on interest," or in this case, "dividends on dividends." This can have a dramatic impact on your portfolio's growth over the long term. 

For example, if you initially invest $10,000 in a dividend-paying stock with an annual yield of 4%, reinvesting those dividends could nearly double your investment in 20 years - assuming the stock's price and dividend yield remain constant. When also adding in regular contributions, the amount of growth becomes even steeper. 

Benefits of a dividend reinvestment plan

  • Automated growth: With DRIP, the reinvestment is automatic, making it easier for you to stick to your investment strategy.
  • No or low fees: Many DRIPs offer the option to purchase additional shares without brokerage fees, making it a cost-effective strategy.
  • Dollar-cost averaging: Since you're buying shares at different price points, you benefit from dollar-cost averaging, which can reduce the impact of market volatility on your portfolio.
  • Flexibility: You can start small and let the snowball effect work over time, making it an accessible strategy for investors of all levels.

Things to keep in mind

  • Overexposure: Reinvesting dividends in the same stock can lead to overexposure to that particular asset. Diversification can be a helpful way of mitigating this by investing in a broad range of stocks, an ETF, or a managed fund.
  • Tax Implications: Dividends are often subject to taxation, even if they're reinvested. Recording your dividends can be a helpful way of simplifying tax-time 
  • Market Risks: Like any investment, dividend-paying stocks are subject to market risks. Make sure to research before committing your money.

For more information on investing, check out some of our share trading guides. If you’re looking to get started in share trading, then check out our share trading page or have a look at some of the providers in the table below. 

Share account comparisons on Mozo - rates updated daily

Search promoted share trading below. Advertiser disclosure.
  • Tiger Account

    Small trade brokerage
    Monthly fee
    $5.50
    $0.00

    Tiger Brokers is an online broker listed on NASDAQ. It offers access to US, ASX & HK stocks, ETFs and US options trading. Mozo special offer for new users only: 7% p.a. on uninvested cash balance up to AUD 100,000 for the first 150 days, with a value up to AUD 2,877. Plus receive US$30 Tesla (TSLA) and US$30 NVIDIA (NVDA) shares with an accumulated deposit of at least AUD 2,000. T&Cs apply – for full details, go to the Tiger Brokers website.

    Details
  • Share Trading

    Small trade brokerage
    Monthly fee
    $7.70
    $0.00

    Buy and sell with a low $7.70 flat fee per trade and access to all ASX Shares and ETFs to invest in with GO Markets. Enjoy dedicated local customer support, a regulated Australian company for trading ASX Shares and ETFs. Plus, enjoy $0 Brokerage on your next 15 trades! (T&Cs apply).

    Details
  • Mozo Experts Choice 2024
    Share Trading

    Small trade brokerage
    Monthly fee
    $3.00
    $0.00

    Invest in AU stocks, US stocks, HK stocks and ETFs on moomoo trading platform. US trades from $0.99 USD, other fees apply. Backed by a Nasdaq-listed fintech. (T&Cs apply).

    Details
  • Mozo Experts Choice 2024
    Share Investing

    Standard

    Small trade brokerage
    Monthly fee
    $0.00
    $0.00

    CMC Markets Invest makes it easy to trade with a handy web and mobile platform, competitive pricing and thousands of securities. Buy Australian and US shares from $0 brokerage (T&Cs apply - see website for full details).

    Details
  • Idle Cash

    Small trade brokerage
    Monthly fee
    $5.50
    $0.00

    Receive interest on your uninvested cash. Deposit over USD/AUD 5,000 to start receiving 1.5% return; 2.25% return on over AUD 50,000; Up to 3.25% return on over USD 50,000. Mozo special offer for new users only: Get USD 50 fractional shares plus USD 25 Tesla shares with a cumulative net deposit of min. AUD 500 within 7 days of the first account opening. T&Cs apply.

    Details
  • ASX Shares

    Small trade brokerage
    Monthly fee
    $0.00
    $0.00

    Join the world’s leading social trading platform, trusted by 30 million users worldwide. Invest in stocks, crypto, ETFs and more - all in one place. Hone your financial skills with a $100K virtual demo account.

    Details
  • Share Trading

    Small trade brokerage
    Monthly fee
    $8.00
    $0.00

    Enjoy access to over 13,000 local and international shares and ETFs with $0 Commission on all international shares including US. Trade pre- and post-market with extended hours on over 70 key US shares. Get better rates on domestic shares for active traders - trade Australian shares from $5 commission. (T&Cs apply). Around the clock customer support from real humans (not chat bots). Trade international and Australian shares from the one account with intuitive desktop and mobile app.

    Details

Mozo provides general product information. We don't consider your personal objectives, financial situation or needs and we aren't recommending any specific product to you. You should make your own decision after reading the PDS or offer documentation, or seeking independent advice.

While we pride ourselves on covering a wide range of products, we don't cover every product in the market. If you decide to apply for a product through our website, you will be dealing directly with the provider of that product and not with Mozo.