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Stocks don’t need to pay out dividends for compound growth. Your last sentence is basically: “betting on compound growth is not the same as compound growth”. Ye
by Moodles 7y ago
Stocks don’t need to pay out dividends for compound growth. Your last sentence is basically: “betting on compound growth is not the same as compound growth”. Yes ok, but a little pedantic imo. Over hundred years of evidence suggests betting on a diversified portfolio of stocks is a good idea in the long term.
- tempsy 7y agoIt’s not being pedantic. When you talk about the theory of compound interest it’s essentially starting with $100, getting paid interest or a dividend, and then reinvesting that so now you have $102 that earns a dividend or interest and so on. Investing in 100 shares of company XYZ that does not pay a dividend, or investing in a company that does pay a dividend but isn’t being reinvested, is not compound interest in the classic sense at all.
- Moodles 7y agoRoughly speaking, if a company doesn’t pay a dividend, it reinvests the profits in itself which compounds its own stock price. You get the benefits of compounding stock prices that way. I think we are arguing over semantics.
- tempsy 7y agoIt’s analogous, depending on the company, but it’s still a misnomer to use compound interest to describe stocks when by definition is only appropriate to describe a loan or deposit (e.g. principal and interest payment)
- deleted 7y ago[deleted]
- PopeDotNinja 7y agoYou're missing a key component of how dividends tend to work. If a stock it trading at $102 and they announce a $2 dividend, the stock almost immediately drops to $2. If you buy/reinvest that $2 back into the stock, effectively nothing has changed.
- loco5niner 7y agoCorrect! Except it drops BY $2 ;-)