How DRIP affects your cost basis

What a DRIP actually is

A Dividend Reinvestment Plan takes the cash dividend you're owed and buys more shares (often fractional) instead of paying it out. Economically, two things happened: you received income, and you bought shares. Most tracking mistakes come from recording only one of them.

• Record only the buy → your cost basis is right but your dividend income is missing, so “ROI including dividends” is understated and the position looks like it never paid you.
• Record only the dividend → income is right but share count and cost basis are wrong, so your unrealised P&L and average price are fiction.

A worked example

You buy 100 shares of an ETF at $50 (ignore fees for a moment).

Notice three things:

1. Cost basis rose by exactly the dividends ($5,000 → $5,122), even though you deposited nothing new. Your cash invested is still $5,000.
2. Average price moved toward each reinvestment price — up after the $55 buy, down after the $48 buy. That's dollar-cost averaging happening automatically.
3. Dividend income is $122, and that $122 is also sitting inside cost basis as shares. Nothing is double-counted: income is one measure, cost basis is another.

If the ETF is now $52: market value is 102.3826 × $52 = $5,323.90. Unrealised P&L is $5,323.90 − $5,122 = +$201.90 (3.9% on cost basis). ROI on cash invested including dividends is ($5,323.90 − $5,000) / $5,000 = +6.5%. Both numbers are true; they answer different questions.

The formulas

For a position with transactions t:

• Shares held = Σ shares bought (Buy + DRIP) − Σ shares sold
• Cost basis = Σ (shares × price + fee) over Buy and DRIP, reduced proportionally when shares are sold
• Average price = cost basis ÷ shares held
• Dividend income = Σ Dividend amounts + Σ DRIP amounts (the DRIP amount is shares × price)
• Unrealised P&L = shares held × current price − cost basis
• ROI incl. dividends = (market value + dividends taken as cash + realised P&L − cash invested) ÷ cash invested

Where spreadsheets go wrong

• Treating DRIP as a plain buy with money from nowhere. Income vanishes.
• Adjusting average price by hand after each reinvestment. One typo and every later figure is off.
• Fractional shares. DRIP almost always produces fractions; a sheet that rounds to whole shares drifts a little every quarter.
• Return of capital distributions. Not income; they reduce cost basis. If your fund does this, your statement will say so — record the income part only.

How Nudge Invest records it

Add a transaction, choose DRIP, enter the shares received and the price per share. That single entry updates share count, cost basis, average price, dividend income, and both ROI figures. Nothing else to maintain. If your broker's statement lists reinvestments, import it as CSV or let the AI coach read the PDF and propose the DRIP rows for your approval.