DIY Investor Toolkit: not reinvesting dividends could result in a significantly smaller portfolio.
Investors who fail to reinvest their dividends could see their portfolio worth almost half as much over the long-term, according to data from Fidelity.
The analysis showed that investing £100 per month in the FTSE All Share index over the past 30 years and reinvesting all dividends would have produced a portfolio worth £130,140.
Had an investor taken the same approach but not re-invested the dividends, it would have been worth just £66,069, just over half the amount that reinvesting dividends would have produced.
Even over shorter periods of time, dividend investment can make a dramatic impact on return.
Investing £100 in the FTSE All Share once a month for 20 years would have produced a portfolio of £50,630 had you reinvested and £33,789 had you not. Even over 10 years, again investing £100 per month, the difference between dividend reinvesting versus choosing to withdraw the income was more than £3,000.
According to Tom Stevenson, investment director for personal investing at Fidelity International: “Many investors are unaware that dividends can be the main driver of investment returns. While growth-focused investors sometimes treat dividends as the icing on the cake, they actually matter more than you think, especially in volatile markets.
He adds: “Over very long periods, almost all the gains from investing in the stock market can be attributed to the reinvestment of dividends.”
Fund investors who would prefer the income withdrawals to be paid out should select the “inc”share class. This share class is suitable for those in retirement.
Younger investors, who do not need to draw on the income should pick “accumulation”, abbreviated to “acc”, to have the dividends reinvested. Those who do, will benefit from the wonders of compound interest, which means in effect that they get returns on their returns.
For those who opt to buy a growth-focused fund, in most cases, the accumulation option will be the only choice available.
Stevenson adds: “For compounding to really supercharge your returns, it requires two simple ingredients: time and the regular reinvestment of returns. The earlier you start, the more time you have to benefit from the returns on both the money you have initially invested, and the returns and dividends you have previously earned on that starting amount.