Compound growth is the process by which the value of an investment grows exponentially because the earnings from the investment are themselves earning interest.
The Power of Time
In the early years, growth seems slow. However, as the principal base grows, the earnings become larger, which then earn even more. This creates an accelerating growth curve where the majority of wealth is generated in the final years.
Reinvestment is Key
For dividend investors, compound growth is driven primarily by reinvestment. By using dividends to buy more shares (DRIP), you increase your share count. Those new shares then pay their own dividends, which buy even more shares.
Inflation Hedge
Compounding is the best defense against inflation. If your portfolio grows at 8% and inflation is 2%, your purchasing power is still compounding at a net 6% rate, ensuring your future lifestyle is protected.
DivAgent Educational Standards
This definition is part of the DivAgent Income Academy curriculum. Our glossary is designed to bridge the gap between institutional jargon and retail investor understanding. Each term is reviewed by our Research Team for accuracy, specifically in the context of:
- Tax implications (Ordinary vs. Qualified)
- Impact on Total Return calculations
- Relevance to Option-Income strategies
- Risk assessment in a retirement portfolio
*While we strive for precision, financial terminology can evolve. Always verify definitions with official regulatory sources (SEC, IRS) when making tax or legal decisions.