Like every investor who turns on their computer in the morning to find one of their stocks has been bid for, my initial reaction to the news US buyout giant KKR (KKR:NYSE) had offered a premium for my shares in healthcare facilities provider Assura (AGR) was ‘happy days’.

The joy was momentary, however, as I then contemplated what it would mean for my portfolio if I no longer owned Assura and the work involved in finding a stock to replace it.

A ROLE STILL TO PLAY

As I see it, every stock in my portfolio has a job to do – it is either there to provide long-term capital gains, or it is there to provide income, there is no in-between.

My income stocks – which are mainly investment trusts together with a few high-yielding FTSE 100 stocks – have one job to do, which is to compound away in the background and build wealth.

I wouldn’t quite put myself in the same category as John D. Rockefeller, who claimed seeing his dividends come in was the only thing in life which gave him pleasure, but ‘making money while you sleep’ is a great feeling.

Capital gains are obviously nice, and a great many friends and colleagues swear by them, but they aren’t guaranteed, and picking stocks for capital appreciation is as much an art as a science.

Luckily, most of my capital gains stocks – which include one or two non-dividend-paying funds – are doing very nicely, and I have no intention of selling them.

Like Warren Buffett, my ideal holding period is forever, but if KKR or another bidder wants to pay a big premium for one of my capital gains stocks I have no objection, all it means is my gains are brought forward.

If one of my income stocks is bid for, however, that means I have to forgo my forever dividend stream and the benefits of compounding, which I’m afraid is a no-no.

In the case of Assura, KKR’s cash offer of 48p per share represented a 28.3% premium to the undisturbed share price of 37.4p, but thankfully the board rejected the proposal.

I say thankfully because, as the table shows, without the bid, in less than three years my shares would be worth more than the 48p KKR was offering anyway.

Purely for the purposes of illustration, let’s say I had 20,000 shares at the end of last year, which means after reinvesting the January dividend I would have 20,449 shares and my holding would be worth £7,648 – based on the undisturbed share price of 37.4p and an unchanged dividend of 0.84p per share.

If I were to sell my 20,449 shares at 48p, I would net roughly £9,815, which looks like a decent return, but, if I just kept using my dividend to buy more shares every quarter, theoretically at an undisturbed 37.4p, and kept compounding my returns, by the end of January 2028 I would own 26,695 shares with a value of £9,984, which is more than the KKR offer.

STAY CALM AND KEEP ON COMPOUNDING

Given my holding period is forever, within another two years I would own 31,886 shares with a value of £11,925, substantially more than KKR was offering, and two years after that – assuming the odds of Earth getting hit by an asteroid haven’t shortened dramatically in the meantime – my holding would be 37,250 shares, worth a cool £14,244 or just under double what I started with.

This is all hypothetical, of course, as the price is now above 40p per share, but I would hope as the business continues to grow the dividend also grows and what I lose on the swings I can make up on the roundabouts.

So, the next time someone makes an offer for one of my income stocks, the answer will be No again, because it’s not in my interest to give up my interest – I’ll stay calm and keep on compounding instead.

DISCLAIMER: The author of this article (Ian Conway) owns shares in Assura.

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