How to reinvest dividends

Most coverage of the stockmarket revolves around share prices and whether they've gone up or down. Dividends enjoy far less attention. While most of us have a pretty good idea of the FTSE 100's level at any given moment (give or take a few hundred points), far fewer people could quote you its current dividend yield (3.7%). That's a pity because dividends are a far more important source of returns than capital gains. In the past 20 years the FTSE 100 has risen by 71% in price terms, equivalent to a rather pathetic 2.7% a year.

However, if every time you received a dividend cheque you reinvested it in the market, then an initial £100 investment would have grown to £337, a much more reasonable 6.2% annual return.

In short, if you want to make money from the stockmarket, you need to be putting your dividends back to work. So what is the easiest way to go about reinvesting? In the past, many companies ran "scrip" schemes that allowed individual shareholders to receive their dividends in the form of shares.

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This is no longer as common as it once was due to changes in corporate taxation, but you will still find some big companies offering the option. If you want to take advantage, your name has to be on the shareholders' register ie, you either have to hold the share certificates or have a personal Crest account. But this is unusual most investors hold their shares via nominee accounts these days, and if that's the case for you, you'll have to see if your broker offers the option.

Alternatively, many brokers run dividend reinvestment schemes. These allow you to specify that you automatically want your dividends to be reinvested by buying more shares in the open market.There will be a trading cost, but it will be a lot lower than the standard dealing cost many brokers reinvest dividends for £1.50 a trade.

If you are investing in a fund rather than individual shares, and you want your dividends to be reinvested rather than paid out, just make sure that you buy the right class of fund. Those described as "accumulation" will automatically reinvest any dividends received, whereas those marked as "income" will pay out dividends as cash on a regular basis.

Income funds usually have the abbreviation Inc appended to the end, while accumulation funds have Acc after their name. You can generally switch between the two classes, although you may have to pay a fee depending on the broker you are using.