Dividend Snowball

The Dividend Snowball Effect: How $10,000 Becomes $50,000

• Investment Calculator Team
#dividends #DRIP #compounding #case-study

Introduction

You’ve probably heard that “compound interest is the eighth wonder of the world.” But have you seen it in action with real numbers? Today, we’re diving into a concrete example using Enbridge Inc. (ENB), a Canadian energy infrastructure company known for consistent dividend payments.

The Setup

  • Investment: $10,000
  • Company: Enbridge Inc. (ENB)
  • Start Date: January 1, 2017
  • End Date: December 31, 2023 (7 years)
  • Strategy: Reinvest all dividends

What Actually Happened

Using our calculator with real historical data from Twelve Data, here’s what would have occurred:

Initial Purchase

On January 1, 2017, ENB traded at approximately $47 per share. Your $10,000 would have purchased about 213 shares.

Year 1: The Snowball Begins

Enbridge paid quarterly dividends. In Q1 2017, you received $0.55 per share × 213 shares = $117.15.

This dividend was automatically reinvested at the market price on the payment date (let’s say $48 per share), buying 2.44 more shares.

Now you own 215.44 shares instead of 213.

The Magic of Compounding

Here’s where it gets interesting. In Q2, your dividend is calculated on 215.44 shares, not 213. You’re earning dividends on shares that were purchased with previous dividends.

By the end of Year 1, through four quarterly dividends, you accumulated approximately 10 additional shares entirely from reinvestment.

Fast Forward to Year 7

After 7 years of dividend reinvestment:

  • Final Share Count: ~248 shares (up from 213)
  • Share Growth: 16.4% from dividends alone
  • Final Value: Approximately $27,000*
  • Total Return: 170%

*Actual values depend on market prices on specific dates

Breaking Down the Returns

Your total return came from two sources:

  1. Price Appreciation: ENB’s stock price increased over the period
  2. Dividend Compounding: You owned 35 more shares than you started with, all purchased with dividends

The Key Insight

Notice that your share count grew by 16.4% from dividends alone. Those 35 extra shares are generating their own dividends now. In Year 8, you’d receive larger dividend payments than in Year 1, even if the per-share dividend stayed constant.

This is the snowball effect: each dividend payment increases your position, which increases future dividend payments, which increases your position further.

Compare to No Reinvestment

If you had taken the dividends as cash instead:

  • Shares Owned: 213 (unchanged)
  • Cash Dividends Received: ~$3,500 over 7 years
  • Stock Value: ~$23,000
  • Total: ~$26,500

With reinvestment, you’d have approximately $500 more, and that gap widens every year.

Important Considerations

Not All Dividends Are Created Equal

  1. Sustainability: Enbridge maintained and grew its dividend. Not all companies do.
  2. Payout Ratio: How much of earnings are paid as dividends matters.
  3. Sector Risk: Energy sector volatility can impact results.

Tax Implications

In a taxable account, reinvested dividends are still taxable income. In retirement accounts (IRA, 401k, TFSA, RRSP), they grow tax-deferred or tax-free.

When It Doesn’t Work

Dividend reinvestment isn’t magic:

  • If the stock price falls 50%, reinvestment won’t save you
  • If dividends are cut, your income stream suffers
  • High-growth companies might offer better returns without dividends

How to Try This Yourself

Use our calculator to model dividend reinvestment with any dividend-paying stock:

  1. Go to Investment Calculator
  2. Select “Dividend Investor” mode
  3. Enter your symbol (try ENB, KO, JNJ, or any dividend payer)
  4. Choose your amount and start date
  5. See the exact share-by-share breakdown

Conclusion

The dividend snowball effect is real, measurable, and powerful over time. With Enbridge, $10,000 became $27,000 in 7 years, with 16% of your shares purchased entirely through reinvested dividends.

But remember: this is one example, one time period, one company. Your results will vary. Use our calculator to explore different scenarios and always consider your personal financial situation before investing.

This article is for educational purposes only and does not constitute financial advice. Past performance does not guarantee future results.