CAGR is the single steady annual growth rate that would have taken something from its starting value to its ending value over a given number of years. It is the smooth line drawn through a bumpy reality.
CAGR = (ending value / starting value) ^ (1 / number of years) − 1. The fractional exponent is doing the work: it asks "what rate, applied over and over, compounds from the start to the end?" That is a different question from "what is the average of the yearly returns," and it gives a different — always lower or equal — answer whenever the returns vary.
Here is why that matters. Example (illustrative): a stock gains +50% in year one, then loses −50% in year two. The simple average of those two returns is 0%. But $100 becomes $150, then $75 — you are down 25%. The CAGR is (75/100)^(1/2) − 1 = −13.4% per year, which is the honest number. The simple average lied to you; CAGR did not. This gap is why compound interest cuts both ways, and why volatility is a genuine drag on long-run wealth rather than just an emotional inconvenience.
Example (illustrative): an investment grows from $10,000 to $20,000 over 6 years. CAGR = (20000/10000)^(1/6) − 1 = 2^(0.1667) − 1 ≈ 12.2% per year. So a doubling over six years is a ~12% annual compound rate. A useful mental shortcut: divide 72 by the CAGR to get roughly the number of years to double — 72 / 12 = 6. That checks out.
The dividend section reports a 5-year growth figure as a CAGR — see 5-year dividend CAGR. Using CAGR rather than a simple average there is deliberate: a company that raised its dividend sharply one year and froze it the next should not get credit for the good year alone. CAGR is also the right way to summarise a multi-year total return, because it accounts for the compounding you actually experienced.
CAGR tells you nothing about risk, drawdowns, or how you would have felt along the way. Two funds with an identical CAGR are not equivalent if one of them fell 60% in the middle and you would have sold at the bottom. Always read a CAGR next to a max drawdown figure. And be suspicious of any CAGR whose start date happens to be a market bottom — a well-chosen window can make almost anything look brilliant. None of this is investment advice.
A simple average adds the yearly returns and divides. CAGR accounts for compounding, so it reflects what actually happened to your money. When returns vary, CAGR is always the lower — and more honest — of the two.
Yes. If the ending value is below the starting value, the CAGR is negative — it is simply the steady annual rate of decline that would produce the same result.
Because it depends entirely on the two endpoints. Starting the window at a market crash and ending it at a peak inflates the figure dramatically. Always check what period a quoted CAGR covers.
Browse all S&P 500 tickers to see this metric applied to individual companies.
Educational research only — not investment advice.