Compound Growth: The ONE RULE you need to know

Compound GrowthOne thing that most investors or undecided investors think first is that you can’t get 10% interests nowadays. You hardly get anything. My dad often reminds me how he was investing at above 10% in the early 80’s but then again mortgage rates were also significantly higher… We need to play the hand that we were dealt which are low interest. That’s where dividends come in to create compound growth.

Rule of 72

Do you know about this rule? It’s a simple rule of thumb to estimate how fast your money will double. You basically divide 72 by the interest rate you have and it estimates the number of years it would take to double your initial capital. In my case, the interest rate is my dividend yield. Your dividend has to be re-invested as the rule assume compound growth.

Compound Growth

I can’t say that I have many years under my belt in proving the Rule of 72 but I started with my stock dividend investment in early 2009. (I officially started with dividends at least 9 years ago but that was mostly through mutual funds.) I do have some example of monthly and quarterly compound growth with some extrapolation for the next couple of years.

Here are a few of my holdings and what their yield is year over year. CPG is the only one without re-invested dividends as I don’t have enough to buy 1 share yet. Both BNS and CUF.UN each are buying 2 shares each. BNS is doing so on a quarterly basis where as CUF.UN is compounding monthly.

BNSCUF.UNCPG
Div.YieldDiv.YieldDiv.Yield
2009 Total$505.197.21%$0.000.00%$0.000.00%
2010 Total$658.077.44%$333.487.66%$222.187.14%
2011 Total$566.447.68%$599.048.03%$380.887.14%
2012 Total$582.127.89%$633.608.49%$380.887.14%

You can see that my yield increases every year except for CPG since I am not reinvesting the dividends. My calculations are based on my initial investment not including the re-invested dividends. The results show the power of compound growth. This is one of the difference with having your dividend re-invested compared with letting your dividends accumulate to pick when to invest. The compound growth is lost or becomes less efficient in the latter case.

All I need is some dividend increase to accelerate my yield growth! You can imagine why investors get excited when a dividend raise is announced. Imagine how fast it accelerates everyone’s¬†compound¬†growth machine! And you didn’t have to lift a finger. That’s your money at work.

Readers: Have you got any investments that have grown over 10% yield? Is it possible to reach a 20% yield?

Image courtesy of Master isolated images – FreeDigitalPhotos.net

3 Responses to "Compound Growth: The ONE RULE you need to know"

  1. Are you talking yield on original investment? I am sure you know that there are a few flaw in that thinking. One being that it doesn't take inflation into consideration.

    Reply
  2. The Passive Income Earner · Edit

    @MG I am. That's simply a comparative number though. You need a baseline to compare. I generally don't spend much time doing adjustment based on inflation.

    I am also not sure how it would affect compound growth. If the money doubles after x number of years, it still doubled mathematically speaking. From a spending perspective, inflation needs to be taken into account otherwise, you may not have as much money as you thought you needed.

    What other flaws is there with calculating a yield from dividends?

    Reply

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