One nice feature of the stock market is that you don’t have to reinvest your income to benefit from compound interest.
That’s because most companies retain a significant portion of their profits even after dividends have been paid.
Those retained profits are then re-invested in the business, compounding profits even if you don’t reinvest your dividends.
Some of the best profit compounders are known as capital-light compounders.
These are companies that:
- Generate high returns on invested capital,
- can invest significant amounts of capital at those high rates of return and
- require relatively little capital to grow, which means they don’t need to borrow to fund expansion and are able to pay significant dividends to shareholders.
That sounds like an attractive combination, so in this month’s Master Investor magazine I reviewed Admiral (insurance), Dunelm (homewares) and Telecom Plus (utilities), all of which have these capital-light compounder features:
3 High-yield capital light compounders
Disclosure: There aren’t many high-yield capital-light compounders out there, so I’m personally invested in all three of these companies and they’re all holdings in the UK Value Investor model portfolio.