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Hi,
High yield securities are thought of primarily as income generators.
But less attention is paid to their ability to compound income over time.
There are three drivers for compounding income from any investment:
- Reinvesting dividends
- Dividend growth on a per share basis
- The time over which the investment is held
Reinvesting Dividends
The first compounding driver – reinvesting dividends – is especially powerful with high-yield securities. Higher yields mean that you can compound your income stream faster by reinvesting dividends.
If all dividends from a 4.0% yielding stock are reinvested, you will compound your income stream at approximately 4.0% annually.
And since high yield securities, on average, don’t have particularly high growth rates, you can “create” income growth by reinvesting dividends until you need them for personal finance reasons.
One downside to creating compounding through reinvesting dividends is that dividends are taxable. This means that following a dividend reinvesting strategy in a tax-advantaged retirement account typically yields better results than a non-taxable account.
With that said, dividend taxes do not come close to offsetting the enormous long-term compounding benefits of reinvesting dividends.
Dividend Growth On A Per Share Basis
There are many high yield securities out there. But it’s non as common for a high-yield security to pay rising dividends on a per share basis over time. When this happens, your income compounds, even when you don’t reinvest dividends.
But if you do reinvest dividends, you get compounding benefits from both owning more shares (through reinvesting dividends), and receiving more income from each share (from dividend growth on a per share basis).
Investment Time
Finally, and less discussed, is the time over which you hold your investment.
Time invested is central to compounding.
You cannot generate significant compounding of income from any one investment without holding periods measured in years.
Too often, investors buy based on expectations for the next quarter (or sometimes even next few days). Time invested matters a great deal.
- Compounding dividend income at 8.0% annually means you only get an extra $0.08 on the dollar in 1 year.
- But compounding for 10 years means you get an additional $1.16 for every original dollar of income.
Longer holding periods also benefit investors by reducing the frequency of capital gains tax payments (in taxable accounts).
This means you get to let money you would’ve paid as capital gains taxes continue to compound for you until you elect to sell.
The best way to invest in high yield dividend growth stock compounders is with the Sure Dividend High Yield Newsletter.
Note: We will publish the new July 2026 edition of the Sure Dividend High Yield Newsletter this Sunday morning!
The Sure Dividend High Yield Newsletter is powered by and included in the Sure Analysis Research Database (SARD).
About The Sure Analysis Research Database
The Sure Analysis Research Database is the best dividend growth stock rating and ranking service.
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Note: See our metrics, along with how we calculate them, on the Sure Analysis Glossary page.
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