But
should investors take the cash or reinvest in the shares after receiving their dividends? The case for
reinvesting dividends is strong – at least for those who do not need
them to boost their income.
How reinvesting dividends makes investors richer
The money buys more shares which will
potentially grow in value and produce more dividend income.
Danny Cox of
Bristol-based broker Hargreaves Lansdown points to a strong dividend
payer, aerospace giant BAE, as evidence of the value of reinvesting.
He
says: ‘If you had invested £1,000 five years ago in BAE shares, and
taken and then spent the £269 of dividends, your shares would now be
worth £1,238.
But had you reinvested those dividends, your BAE shares would now be worth about £1,617.’
Maike Currie, associate director of Fidelity Personal Investing, says companies such as Royal Mail pay dividends to retain shareholders.
Cash
and bonds have taken a back seat as interest rates have plummeted,
while investors’ thirst for equity income funds – where managers forage
for the best dividend paying companies – has grown.
It's not just shares, reinvesting fund income is a winner too. The UK Equity Income sector is expected to be a top pick when the Nisa investment limit of £15,000 comes into force on Tuesday.
Under the new Nisa regime, investors will be able to invest up to £15,000 this tax year in a mix of funds, shares and cash.
UK equity
income funds are yielding anything between about 2 per cent and 7 per
cent, with most paying between 3.5 and 4.5 per cent.
An
investment ten years ago in the popular Invesco Perpetual Income fund
would have doubled in value if the income had been taken. But it would
have nearly trebled if the income had been reinvested into the fund.
Don't just hunt for dividends in the UK
Fidelity’s
Currie says: ‘Something to be wary of in the UK is that 88 per cent of
dividends paid by FTSE 100 shares come from just 15 companies,
particularly oil, tobacco and pharmaceuticals companies.’ This
makes an argument for spreading the dividend search wider into global
equity markets. Many companies across the globe are now paying
dividends, including those listed on the once growth focused US stock
market.
Many
other countries and regions also pay good dividends. Currie says: ‘A
number of emerging market countries, such as Brazil, actually have laws
requiring companies to return some of their profits to investors.’
You can start a do-it-yourself Drip by simply buying shares yourself with the dividends received.
Alternatively, you can spread your risk by investing the money elsewhere.
Think of re-investing the dividends instead of taking the cash unless you are in serious need of cash.
