How Stocks Compound
Stock returns come from two sources: price appreciation and dividends. When you reinvest dividends, they buy more shares which generate more dividends — creating a compounding loop. Historically, about 40% of S&P 500 total returns came from reinvested dividends.
The Power of Dividend Reinvestment
$20,000 invested at 8% growth + 2% dividends over 20 years: without reinvesting dividends = $93,219 + $21,660 cash dividends. With reinvestment = $132,665. Reinvesting dividends adds $17,786 in extra growth through compounding.