Powerful Investment Growth with Compounding

Have you dreamed of making money without doing anything?  You know, just laying around the beach with an umbrella drink in hand, knowing money is falling into your bank account as you lounge in a cabana overlooking the surf?  What if the money pouring into your bank account next week was much greater than the money going in today without so much as ordering another umbrella drink?

Ah, the life!

Ok, back to reality.  While it may not be as spectacular or compelling as the vignette above, Dividend Farming does function much the same way thanks to compounding, albeit over a longer period.  Check out the charts below to see what I mean.

The first chart shows what happens when you start with $10,000 invested in year zero at a rate of 7%.  Your money is compounded annually with a 30-year horizon.  Yes, it’s longer than a week, but stick with me.

7% Compound Growth Curve

As you can see, your nest egg has gone from $10,000 to more than $75,000 during that period.  It’s grown more than 7.5 times and you did nothing; just watched it grow. 

The next 2 charts provide insight into the power of compound growth by measuring the slope or rate of growth during 10-year intervals along your investment curve.

In the chart above, I stripped out the investment figures for the years between 0, 10, 20, and 30 leaving a clean, straight growth line for each period.  With a simplified curve, I calculated the slope of each 10-year interval as shown in the chart below.  The change in investment value between any two points was divided by 1,000 to reduce their scale making it easier to see and understand the differences in slope.

During the first 10-year period, the slope of investment growth was 1.0.  During the 2^nd 10-year period, the slope of the line grew to 1.9, nearly doubling.  In the 3^rd 10-year period, the slope of the investment growth nearly doubled again, reaching 3.7.

Here’s the key takeaway.  The power of compound growth, like that available with strong, consistent dividend paying stocks, increases over time.  The longer your investment horizon, the greater the strength you can harness. 

Exercising this power requires the patience of a Dividend Farmer.  It doesn’t mean you’ll be sipping a cool drink on a pristine beach today or tomorrow while Benjamins pour into your bank account.  However, the power of compound growth available with dividends automatically reinvested means living that beach life down the road is possible.

The thoughts and opinions expressed here are those of the author, who is not a financial professional, and therefore should not be considered as investment advice.  This information is presented for education and entertainment purposes only.  For specific investment advice or assistance, please contact a registered investment advisor, licensed broker, or other financial professional.