Why yield-on-cost is the real number to chase
Current yield (dividend ÷ today's price) tells you what new buyers earn. Yield-on-cost (dividend ÷ your original purchase price) tells you what YOU earn. A position bought at 4% yield in 2010 with 8%/yr dividend growth now pays ~12% yield-on-cost — even if the current-price yield is still 4%. This is the engine behind dividend-growth investing.
- • SCHD investors from 2011 today see ~10–14% yield-on-cost on original purchases.
- • Dividend Aristocrats (25+ years of growth) average 6–8% annual dividend hikes.
- • Yield-on-cost lets retirees beat inflation without selling shares.
DRIP vs cash: when each makes sense
DRIP (reinvesting dividends) compounds your share count and accelerates income growth — best for accumulation phase. Taking dividends as cash makes sense in retirement, or when you need the income to live on. Mid-career investors should DRIP 100%; pre-retirees often shift to 0% DRIP 3–5 years before they need the income.
Taxes change everything
In a taxable brokerage, US qualified dividends are taxed at 0%, 15%, or 20%. Ordinary dividends (REITs, BDCs, foreign stocks without tax treaty) hit your marginal rate — often 24–37%. Inside an IRA/Roth/401k, dividends compound tax-free. Same portfolio in a Roth grows ~25–40% larger over 30 years than the taxable version.
Dividend income planning gets distorted by yield-chasing (high yield often signals risk), DRIP compounding (which changes the curve dramatically over 10+ years), and forgetting that qualified dividends are taxed at long-term capital gains rates while non-qualified are taxed as ordinary income. This calculator models real after-tax compounding so you can plan a passive income target, not a paper one.
What each input means
Get these inputs right and the output is reliable. Get them wrong and the calculator just multiplies bad assumptions.
Starting portfolio value
Current invested capital in dividend-paying assets.
Typical range: Use the actual portfolio, not target.
Average dividend yield
Annual dividend ÷ price.
Typical range: S&P 500 ≈ 1.3–1.6%; dividend ETFs (SCHD, VYM) ≈ 3–4%; REITs 4–7%; covered-call ETFs 7–12%.
Dividend growth rate
Annual rate at which the dividend per share grows.
Typical range: S&P 500 ≈ 5–7% historical; dividend aristocrats 6–10%; REITs 2–5%; covered-call funds 0–2%.
DRIP (reinvest dividends?)
Whether dividends are automatically reinvested.
Typical range: Yes during accumulation; switch off in distribution phase.
Tax rate (qualified vs. ordinary)
Federal + state on dividend income.
Typical range: Qualified: 0%, 15%, or 20% federal. Ordinary (REIT, covered call): up to 37%.
Worked examples
Real scenarios with the math walked through line by line.
Accumulation phase, DRIP on
Scenario: $250k portfolio, 3.5% yield, 6% dividend growth, DRIP on, 15% tax, 20-year horizon.
Math: Combined effective return ≈ 3.5% reinvested + 6% growth = ~9.5% (after tax ~8.1%). Future value ≈ $250k × (1.081)^20 ≈ $1.18M. Year-20 dividend income ≈ $1.18M × 3.5% × (1.06)^20 ≈ $132k/yr nominal.
Outcome: $132k pre-tax annual income from a $250k start — possible only with DRIP discipline and dividend growth assumptions actually holding.
Distribution phase
Scenario: $800k portfolio, 4.2% blended yield (dividend ETF + REIT mix), DRIP off, 22% effective tax (mix of qualified + REIT ordinary).
Math: Annual gross = $33,600. After tax = $26,208 (~$2,184/mo).
Outcome: Realistic monthly passive income from a $800k dividend-focused portfolio. Inflation-adjusted real income rises only if dividend growth outpaces CPI.
Common mistakes
Where this calculation usually goes wrong in the real world.
- Chasing yield without checking sustainability. A 9% yield often signals dividend cut risk.
- Modeling pre-tax income. Qualified vs. ordinary tax treatment changes the take-home 5–25 points.
- Forgetting expense ratios on dividend ETFs and CEFs (0.06–1.5%).
- Assuming covered-call ETFs (JEPI, QYLD) compound like dividend growers. They typically don't grow dividends and underperform in bull markets.
- Not modeling currency risk on international dividend stocks.
When to use this calculator
- Setting a passive income target and back-solving the required portfolio size.
- Comparing DRIP-on vs. DRIP-off compounding over decades.
- Evaluating whether REITs or covered-call ETFs improve total return after tax.
- Annual review against actual portfolio performance.
Glossary
Yield
Annual dividend ÷ current price. Backward-looking; future yield depends on price + dividend changes.
DRIP
Dividend reinvestment plan. Automatic reinvestment of dividends into more shares of the same security.
Qualified dividend
Dividends from US C-corps held >60 days. Taxed at long-term capital gains rates (0/15/20%).
Dividend growth rate
Annual % increase in the per-share dividend. Drives long-term real income more than starting yield.
More questions answered
Should I prioritize high-yield or dividend-growth stocks?
Dividend growth typically wins over 15+ years. A 2% yield growing 8% annually overtakes a 5% yield with 0% growth in roughly year 14 and dramatically outperforms thereafter. High yield is appropriate near or in retirement when current income matters more than compounding; growth-oriented dividend portfolios are better for accumulation phase.
Are covered-call ETFs (JEPI, QYLD) worth it?
Trade-off. They generate 7–12% yield but cap upside in bull markets and have weak (or negative) total return over 10+ year periods. Useful for income-only allocation slices (10–25% of a retirement-stage portfolio) and inappropriate for accumulation. Total return matters more than yield until you actually need the cashflow.
How do I calculate yield-on-cost after years of DRIP?
Yield-on-cost = current annual dividend per share ÷ original price paid. A $50 stock bought 15 years ago paying $5/year today has 10% yield-on-cost, even if current yield is 3%. This is the metric that captures dividend growth — and explains why long-time holders of dividend-growth stocks can collect 8–15% on cost while new buyers see 2–3% yield on the same stock.
Methodology last reviewed: 2026-05 by the RevenueLab editorial team.
FAQ
How much do I need invested to live off dividends?
At a 4% yield, $1M generates $40k/yr ($3.3k/mo). At a 5% yield (REITs, BDCs), $750k generates $37.5k/yr. Most 'living off dividends' targets sit at $750k–$1.5M depending on yield strategy and living costs.
What's a realistic dividend growth rate to model?
S&P 500 historical: ~6%/yr. Dividend Aristocrats: ~7%. SCHD: ~10%. REITs: ~3–5%. High-yield BDCs/MLPs: 0–3%. Modeling 5–7% is realistic for a balanced dividend portfolio.
Are dividends taxed if reinvested?
Yes, in a taxable brokerage — reinvestment doesn't defer tax. Inside an IRA/Roth/401k, dividends (reinvested or cash) compound tax-free. This is why dividend-heavy strategies belong in retirement accounts when possible.
What's the difference between yield and yield-on-cost?
Yield = dividend ÷ current share price (what new buyers earn). Yield-on-cost = dividend ÷ your original cost basis (what YOU earn after years of dividend growth). A 4% yield buy that grew dividends 8%/yr for 10 years has ~8.6% yield-on-cost.
Should I prioritize high-yield or dividend growth?
Mid-career investors should tilt toward dividend growth (4% yield + 8% growth beats 8% yield + 2% growth over 15+ years). Pre-retirees and retirees can shift toward higher current yield to maximize income today.