As Investor B adds shares his stock dividends become larger and larger because of additional shares, but also because he is benefiting from the increase in the dividends per share. When reinvesting dividends more shares of an appreciating asset are purchased. But Investor B has several additional advantages that multiply the benefits of exponential growth compounding. Investor A has the advantage of exponential growth in interest. Total Shares w/ reinvestment of dividends Imagine if Investor B were able to consistently purchase stocks that grow faster than the modest 3% in this example.ĭividends Per Share (increases 3% per year) In 50 years the portfolio grows almost 30 times the original investment. In 30 years the dividend stocks increase over 7 1/2 times more than the original investment. Our illustration assumes a 4% dividend (same as the interest for Investor A) with a modest 3% annual increase in the dividend and stock price. Investor B chooses to invest in dividend growth stocks and participate in compounding through reinvesting dividends. In 50 years the value increases to over 7 times the original investment. In 30 years the fixed rate investment grows over 3 times as big as the original investment. The powerful benefits of compounding are illustrated by the fact the amount of interest each year becomes larger and larger even though the interest rate remains stable at 4%. Investor A chooses to purchase a fixed rate investment which earns 4% and will reinvest the interest each year. Here is an illustration to compare and contrast investing in fixed rate investments such as a CD or bond versus investing in a dividend growth stock, or better yet, a portfolio of dividend growth stocks. Illustration of Interest Compounding Compared to Dividend Compounding This makes time the most important element for taking advantage of this wealth building strategy. Even though the growth rate may remain the same, the amount of interest or dividends each time period is not constant but increases each successive period of time. Compounding occurs when interest or dividends are reinvested and added to what is already there.Ĭompound growth is geometric or exponential growth (i.e. Interest compounding is a powerful financial concept, but dividend growth compounding multiplies the benefits of exponential growth.

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