Reinvesting Dividends: The Snowball

You receive a €40 dividend on your shares. A small amount — what's the big deal? You can spend it on dinner or put it back into the portfolio. The choice looks like it doesn't matter. It does — and over 30 years the difference is measured in tens of thousands of euros.

This article explains how reinvested dividends set a "snowball" in motion, why total return is more than the movement of the price, and how the tax on dividends enters the calculation. The goal is to understand the mechanism — with no promises of returns and no "buy/sell" signals.

⚠️ This is educational material, not tax or investment advice. Tax rates and regimes change — check the current framework with the National Revenue Agency (NRA) (opens in new tab) or a licensed professional before calculating your actual obligations.

Total return = price + dividends

When you follow a stock, you usually look at the price. But the price is only half the story. Total return consists of two components:

• Price appreciation — the stock is worth more than you paid for it.
• Dividends — the part of the profit the company pays you in cash.

Historical data shows that over long periods a significant part of the total return of broad indices comes precisely from dividends and — crucially — from their reinvestment. If you look only at the price chart, you systematically underestimate how much long-term investors actually earned.

The snowball: DRIP

Reinvesting dividends is often automated through a DRIP (Dividend Reinvestment Plan) — every dividend received immediately buys more units of the same asset instead of sitting in cash.

The effect is a chain reaction, and that is exactly why it is called a snowball:

• Dividends buy more shares.
• More shares pay more dividends next time.
• Those larger dividends buy even more shares.

This is compound interest in its purest form, applied to the dividend stream. Each cycle makes the base a little larger, and the next dividend larger still. At first it is imperceptible; after two decades it is the engine of the result. The full mechanism of compounding is in compound interest — the eighth wonder.

Reinvesting vs. withdrawing: the numbers

Let's see it concretely. A portfolio of €10,000 that earns 3% price appreciation plus a 4% dividend yield — that is a total return of about 7%. What happens over 30 years in the two cases?

• You reinvest the dividends. The full 7% compounds. Result: about €76,000.
• You withdraw and spend the dividends. Only the 3% appreciation compounds in the capital; you receive dividends as income but spend them. The portfolio grows to about €24,000.

The difference of more than €50,000 on the same initial €10,000 is the entire value of reinvesting. See the reinvesting scenario at 7% and compare it with the price-only growth at 3% in the calculator.

This does not mean withdrawing is a mistake. For someone who lives off their portfolio, dividend income is precisely the goal — the topic is covered in passive income from dividends. If you want to get a feel for how much capital would be needed for a specific monthly income at a 4% dividend yield and 5% tax, calculate it in the passive-income calculator. The question is the phase: are you accumulating or spending?

Dividend growth amplifies the snowball

The snowball has a second gear: companies that do not just pay a dividend but regularly increase it. If the dividend itself grows year after year, every reinvested contribution buys units that will pay even more tomorrow — growth on top of growth.

This is something different from chasing the highest dividend yield today. A very high yield is sometimes a warning sign — the market has lowered the price because it expects the dividend to be cut or suspended. A moderate but steadily growing dividend often does more for the long-term result than a seemingly generous but fragile one. For the trade-off between high yield and stability, see passive income from dividends.

How the tax on dividends enters

Here is the point where the snowball meets reality. In Bulgaria dividends are usually taxed with a final tax of around 5% (check the current rate — see dividend tax in Bulgaria). This means that from every euro of dividend you reinvest not the whole amount but about 95 cents.

A small difference at first glance — but compounding magnifies even small leaks. If the tax lowers the effective reinvested return from 7% to about 6.8%, then over 30 years in the example above the final capital drops from ≈ €76,000 to ≈ €72,000. A few tenths of a percent a year turn into a few thousand euros at the end.

The numbers are illustrative and simplified — the real effect depends on the method of taxation, the moment of withholding, and the specific instrument. The lesson is qualitative and robust: the less that leaks along the way, the bigger the snowball at the end. That is why tax-efficient structures (for example accumulating ETFs that reinvest internally) are an important topic for the long-term investor.

Accumulating vs. distributing funds

If you invest through ETFs, there is an important practical detail — funds come in two flavors:

• Distributing — they pay the dividends in cash into your account. You decide whether to reinvest them or withdraw them.
• Accumulating — they reinvest the dividends internally and automatically, without the money passing through your account.

For someone in the accumulation phase, accumulating funds have two advantages. First, they save you the manual work and the possible commission on repurchasing. Second — and more important for the snowball — in a number of cases they simplify or defer the tax moment, because there is no cash dividend paid out to be taxed immediately. The exact effect depends on the type of fund and the tax framework, so check with the National Revenue Agency (NRA) (opens in new tab). If you are still clarifying what an ETF is, start with stocks vs ETFs vs crypto.

How to reinvest in practice

The mechanism is simple, but the details save money:

• Check for an automatic DRIP. Some brokers offer an option for your dividends to buy new units automatically, sometimes with no commission.
• Or reinvest manually — for example once a quarter, so you don't leave cash sitting idle.
• Or choose an accumulating fund and let the reinvesting happen on its own, inside the fund.
• Watch out for commissions on small amounts. If every purchase has a fixed fee, it is sometimes wiser to accumulate a few dividends and buy at once.

The goal of all three paths is the same: the dividend should not stop in cash but return to work as fast as possible — that is the fuel of the snowball.

What this does NOT mean

• This is not a promise of returns. A 7% total return is an illustration, not a guarantee — real dividends and prices vary, and companies can reduce or suspend the dividend.
• A dividend is not "free money." When a company pays a dividend, its price usually falls by approximately the same amount. Value is not created by the payout itself — it was already in the stock.
• The tax framework is subject to checking. Rates change; always check with the National Revenue Agency (NRA) (opens in new tab).
• Withdrawing is not "bad." In the spending phase, dividend income is the goal, not a mistake.

Sources

• The National Revenue Agency (NRA) — the regime for the tax on dividends under the Personal Income Tax Act (ZDDFL): nra.bg (opens in new tab).
• The concept of total return (price + reinvested dividends) is standard in financial theory; comparisons of "price return" versus "total return" indices illustrate it.

Continue reading

• Compound interest — the eighth wonder of the world — the engine behind the snowball.
• Passive income from dividends — the other side: when you withdraw rather than accumulate.
• Dividend tax in Bulgaria — what the tax takes out of reinvesting.
• Investing for beginners 2026 — the whole picture step by step.

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