Dividends should be reinvested back into the market if higher returns are your goal. Reinvesting dividends back into a stock or fund delivers a better performance compared to allowing dividends to lay idle in your account. The following graph highlights the return premium from investing in dividends by comparing the high return of a dividend index against the lower return of FTSE All Share when dividends are not reinvested.
- FTSE UK Dividend Plus index (green) returned 80%. This highest-returning index underlines the advantage of dividends as the whole index is made up of dividend-paying stocks.
- FTSE All Share Price Return (red) returned 35%. This return represents the performance when dividends are not reinvested back into the market. In other words, this index is representative of someone receiving their dividend and leaving it idle in their account.
Past performance is not a reliable indicator of future results
Source: Morningstar Direct from as at 31 July 2010 to 31 July 2015. All returns in GBP.
Source: Morningstar Direct from as at 31 July 2010 to 31 July 2015. All returns in GBP.
How to invest in dividend payers
- Stocks: Vodafone is one of the biggest dividend payers listed on the FTSE and a popular stock holding for TD customers. But upon receiving big dividends, many investors fail to reinvest the money through buying back more shares. This failure to reinvest leads to a much lower return than a disciplined reinvestment strategy. The following graph illustrates the much greater return from a dividend reinvesting approach (blue) compared to keeping dividend pay-outs and receiving only the price return of the share (red).
Past performance is not a reliable indicator of future results
Source: Morningstar Direct from as at 31 July 2005 to 31 July 2015. All returns in GBP
Source: Morningstar Direct from as at 31 July 2005 to 31 July 2015. All returns in GBP
- Funds: The Royal London UK Equity Income fund is a safer dividend strategy than investing in merely one or two income-paying stocks. The fund invests in approximately 50 stocks comprising of traditional dividend payers such as BP and Rio Tinto alongside smaller listed companies like Stobart Group, the well-known freight logistics firm. The wide range of stocks reduces risk due to the fund being powered by different parts of the British economy from oil-and-gas to banking to lorries driving up and down Britain’s motorway network. Royal London has not only beaten the FTSE All Share index but also the dividend index too, demonstrating the benefits of active management.
Past performance is not a reliable indicator of future results
Source: Morningstar Direct from as at 31 July 2010 to 31 July 2015. All returns in GBP.
Source: Morningstar Direct from as at 31 July 2010 to 31 July 2015. All returns in GBP.
Dividend reinvestment is not suitable for everyone.
Any investment types used are for illustrative purposes only and are not a personal recommendation.
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