Enter your holdings and dividend yields to see projected annual and monthly income. Compare DRIP (dividend reinvestment) versus income withdrawal strategies over a 10-year horizon.
| Year | Gross Income | Net Income | Monthly Net | Portfolio Value |
|---|
Dividend investing is one of the most popular income strategies for UK investors, particularly in retirement planning. The appeal is simple: own shares in businesses that pay you a portion of their profits regularly. But the numbers matter — yield on cost, dividend growth rate and the power of reinvestment all determine whether a dividend portfolio delivers the passive income you expect.
Dividend yield is the annual dividend divided by the current share price. Yield on cost is the annual dividend divided by your original purchase price. If you bought at £10 with a 4% yield and the dividend has grown to 6% of your original cost after 5 years, your yield on cost is 6% even if the current yield is still 4% (because the share price has also risen). Yield on cost is the metric that matters for income investors.
Reinvesting dividends rather than taking them as income accelerates portfolio growth through compounding. A £50,000 portfolio at 4% yield, 5% dividend growth and 3% capital growth: taking income produces approximately £65,000 portfolio value after 10 years. Reinvesting all dividends: approximately £85,000. The 20-year difference is even more dramatic.
A 9% dividend yield often signals that the market believes the dividend is unsustainable. When a company cuts or cancels its dividend, the share price typically falls sharply. A 3.5% yield from a company with 10 years of consecutive dividend growth is usually more valuable than a 9% yield from a company with a deteriorating balance sheet. Always research dividend cover (earnings per share / dividend per share) — cover above 2x is generally considered safe.
The FTSE 100 average dividend yield is approximately 3.5–4.0% in 2026. Individual stocks range from under 1% (growth companies) to over 8% (higher-risk or special situations). A yield of 3.5–6% from a company with consistent dividend growth and strong cover (earnings ÷ dividend > 2×) is generally considered attractive. Yields above 7% warrant careful investigation of sustainability.
The first £500 of dividend income per year is tax-free (dividend allowance 2026/27). Above this: basic rate taxpayers pay 8.75%, higher rate 33.75%, additional rate 39.35%. Within an ISA, all dividends are completely tax-free with no reporting. If you have significant dividend income, an ISA should be the first priority.
DRIP (Dividend Reinvestment Plan) automatically uses your dividend payments to purchase additional shares rather than paying them out as cash. This means your subsequent dividends are calculated on a larger share count, compounding your income over time. Most UK brokers offer DRIP as an option. Over long periods, DRIP significantly outperforms taking cash dividends if income is not needed immediately.