Dividend Compounding
Dividend Compounding is the process where the dividends earned on an investment are reinvested to purchase more shares, which produces more dividends, leading to a snowball effect of increasing returns. As one of the cornerstones of long-term investment strategies, compounding allows your investments to grow at an accelerated pace over time. In essence, each reinvested dividend increases the number of shares owned, leading to higher dividend payouts in subsequent periods. Whatever route you take, compounding is more effective over long periods, which is why most advisors recommend that people start investing and saving as young as possible – even if you’re not investing a lot.
MORE ABOUT COMPOUNDING
Simply put, compounding occurs when the interest or dividends from your investment product are reinvested, earning you more interest and helping your wealth grow.
Start saving and investing early — either in an account that earns interest or with an investment that pays dividends that can be reinvested.
The key thing to takeaway is that the longer you compound your interest, the larger the size of the prize.
Albert Einstein referred to compounding as the ‘eighth wonder of the world’.
Warren Buffett – one of the world’s most successful investors – is often quoted as having said, “My wealth has come from a combination of living in America, some lucky genes and compound interest.”
INVESTMENTS THAT COMPOUND WELL
Exchange Traded Funds.
ETFs are a collection of hundreds or thousands of stocks or bonds in a single fund that trades on major stock exchanges.
Individual Stocks.
Companies can also embrace compounding by reinvesting their profits to make more profits. This hopefully has a similar effect on their share prices.
Dividend Stocks.
These funds can be reinvested in the same stock or another stock to compound returns. Those reinvested funds will also make dividends/returns going forward.
Also known as fixed-income or fixed-interest investing, bonds are loans made to a government or company and paid back with interest.