What the big picture shows us about UK shares

Today’s 24-hour news cycle makes it all too easy for investors to get side-tracked and bogged down by day-to-day events, so it’s worth stepping back to look at the big picture.

The annual Barclays Equity Gilt Study is one of the biggest pictures there is: it covers the performance of UK shares going back to the end of 1899.

It confirms that equities do better over the long run than gilts or cash: since 1899, they have returned 5.1% a year after inflation, compared to 1.2% for gilts and 0.8% for cash. Over 50 years and 20 years, equities saw returns of 5.5% and 4.1% respectively.

If you hold equities for 18 years in a row, there’s a 99% chance of them beating bonds and cash, says the report.

But what many investors don’t realise is how much dividends matter. Those who came of age in the soaring stock markets of the 1980s and 1990s are especially prone to thinking that capital gains are key.

But Barclays notes that £100 invested in 1899 would have grown to an inflation-adjusted £28,386 today if the (pre-tax) dividends received were always reinvested. Without reinvestment, the original £100 would be worth just £191.

In short, reinvesting income (or what we sometimes call ‘dividend compounding’) would leave you with a return 149 times greater than not doing so.

Since 1945, £100 invested would be worth £271 today in real terms without reinvested income. That jumps to £5,140 if you reinvest the dividends. It’s a similar story in the American market. So keep putting those dividends back to work.

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