0

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?

user3552459
  • 11
  • 1

1 Answers1

1

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.

Bob Baerker
  • 77,328
  • 15
  • 101
  • 175