Price Return vs. Total Return
A 7% price return and a 7% total return are not the same number — and only one of them assumes you reinvested every dividend along the way.
What Is It
Total stock return has two parts: price return, the change in a stock or index's price, and dividend return, the cash paid out along the way. Add them together and you get total return. Price return compounds on its own — it's just the price moving year over year. Dividend return only compounds if it's reinvested; taken as cash, it's linear income sitting outside the growth engine, not exponential growth.
Why It Matters
This is exactly why index providers like S&P and MSCI publish two versions of the same index: a price-return version and a total-return version. The commonly quoted "the S&P 500 averages about 10% a year" figure is a total-return number — it already assumes every dividend along the way was reinvested. A brokerage account set to pay dividends out as cash instead of automatically reinvesting them won't compound the same way, even holding the exact same stocks. The general mechanics of compounding are covered in Compound Interest; the mechanism generating this second return stream is covered in Dividend Investing.
Quick Example
$10,000 invested for 30 years at a 7% annual price return and a 2% dividend yield grows to about $137,885 if every dividend is reinvested. Taking those same dividends as cash instead leaves a $76,123 price-only balance plus $18,892 collected in dividends along the way — cash that never got the chance to compound — for $95,015 total. The gap: reinvesting is worth about $42,871 more over the same 30 years, from the exact same starting investment and the exact same underlying returns.
See how the gap changes with your own numbers: