Compounds arise when income is added to the principal, so that from that moment on, the interest that has been added also itself earns interest. This addition of income to the principal is called reinvestment. 
Returns compound on the sum of all past earnings as well as on the principal. For example, suppose $1000.00 (the principal) is used to buy shares in a closed-end company yielding 10 percent compounded annually. At the end of year 1, $100.00 is earned. At the end of year 2, the income is $110.00, $100.00 on the original principal and $10.00 on the interest - an so on in future years. 
As investors use the term, compounding everything is expressed as total returns. The change in value of an investment over a given period, assuming reinvestment of any dividends and capital gain distributions, expressed as a percentage of the initial investment.  The total return includes dividends, capital gains distributions, and the increase in the net asset value of the property.