Breakdown
How it works
Total return from dividend stocks comes from three sources: the starting yield, dividend growth and price growth. Reinvesting converts income into more shares and roughly doubles the final income over 20 years compared with taking the cash.
Formula
Worked example
50,000 at 4% yield, 5% dividend growth, 4% price growth, 20 years with DRIP: income ≈ 12,100 a year, portfolio ≈ 250,000, yield on cost 24%.
Frequently asked questions
What is yield on cost?
This year's dividend divided by what you originally paid. It rises as dividends grow and shows why holding dividend growers for decades is powerful — but it is not a reason to hold a stock whose current yield is poor.
Are dividends taxed?
UK: £500 allowance then 10.75%/35.75%/39.35% outside ISAs and pensions (see the dividend tax calculator). GCC residents pay no local tax, but US stocks carry 30% withholding (15% with a W-8BEN treaty rate — none for UAE/Saudi/Qatar residents).
High yield or dividend growth?
Very high yields (8%+) often signal a cut coming. A 3–4% yield growing 6–8% a year typically beats a static 7% yield within 10–12 years and carries less risk.