A dividend reinvestment plan, often called a DRIP, uses a cash distribution to buy more shares. Those shares may receive later distributions, which can create compounding.
Order matters
Our model adds the period contribution, calculates the distribution on the resulting shares, applies the tax assumption, and then reinvests the remaining cash at the assumed period price. Price and distribution growth are applied separately after the payment.
Dividend growth is not price growth
Distribution per share and market price can move in different directions. A company can grow a dividend while its price falls. A fund can pay a high distribution while its net asset value declines. Keep the two assumptions separate.
Stress-test the projection
Try a distribution cut, a flat price, and a negative price scenario. Compare reinvestment with cash payments. A useful model shows sensitivity instead of hiding uncertainty behind one optimistic line.
Primary sources
Tax rules, fund distributions, security prices, and company finances change. Verify current primary sources and seek qualified advice for your situation.