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I've read about compounding and understand dividend reinvestment, but still not sure about compounding on stocks with no dividends.

Is this scenario correct?

Share purchase price = $ 10.00 $ 0 dividend stock Share sell price one year later = $ 10.00

Profit = $ 0.00

I hear statements like "a stock returns 7 % annually and with compounding interest your investment is worth x dollars."

But, if a buy a stock and it is 7% higher at some point later, wouldn't I just make a flat 7% on the original principal?

$100 investment, sell at anypoint in the future, and make $ 107.00? Even if it is 30 years later?

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It's a small detail but if you reinvest dividends, you get compound growth not compound interest. The compounding comes from share price appreciation (growth). An infrequent exception would be a stock that pays a blend of interest and dividends.

If there is no dividend, there is no compounding. If share price appreciates, you achieve growth (no compounding).

There are a number of DRIP calculators available. When there's a dividend, there will be two displays, one with dividends reinvested and one without. If there is no dividend, there is only one display and it will be growth of X dollars and associated stats.

  • Ok I’ll bite. I’ve owned Berkshire Hathaway for 30 years. No dividend. What words shall I use to describe the growth in value of the stock over the last three decades to compare it to friends who have had their money in the S&P and use the term CAGR? – JoeTaxpayer Jun 2 at 14:36
  • Hi Joe. Compound interest refers to interest on interest. There's additional money being added and it compounds. What I meant with no compound growth is that no additional money has been added (interest, dividends). All that has changed is share price. CAGR is accounting analysis. I leave that to you. – Bob Baerker Jun 2 at 23:06
  • Of course the word 'interest' is wrong. But. I am surprised you are suggesting the phenomenon of CAGR simply doesn't apply and the acronym not be used to discuss the long term return of a stock, if only for the lack of a dividend to reinvest. BRK-A ended 1999 at $56,100, and 2018 at $306,000. That's 9.34% CAGR, vs 4.83% for the S&P. Do you have a better way to compare apples to apples? Better yet, what is the word you prefer over CAGR? – JoeTaxpayer Jun 2 at 23:31
  • Compounding refers to the increasing value of an asset due to growth earned on both a principal and accumulated interest and/or dividends. There is no compounding with Berkshire. It was simply share price appreciation over the past 30 years. Now you have introduced CAGR into this. CAGR is the annual rate of return that would be required for an investment to grow from its beginning balance to its ending balance, assuming reinvestment. It's an accounting statistic that describes the long term return of a stock. It's apples and oranges. – Bob Baerker Jun 3 at 11:43

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