Imagine you had a penny that doubled in value every day for a month.
Sure, after a week, you’d only have a paltry sixty-four cents. That’s not even enough to buy something off the dollar menu at your favorite fast-food joint. After another two weeks, you’d have less than $10.
But if you can hold out for just two more weeks, the doubling power will turn that starting penny into $1.3 million dollars.
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That’s the power of compounding.
Now, we don’t have magic pennies (that I know of). But we do have the next best thing: Dividend stocks.
When companies pay their shareholders money, investors who use the proceeds to buy more share are able to compound their wealth over time. While not as quickly as a magic penny, over the course of years, this process can make a major difference for your investment returns. And over the course of decades? It can turn a few thousand dollars into over a million.
It’s a strategy explaining why everyday folks like teachers and janitors, often earning less than the average American family, can amass a multi-million dollar nest egg to leave for charity when they pass on. Harnessing this power takes a little time and effort, but once in place, the compounding power allows your money to most effectively work for you.