How to reinvest dividends

If you want to make money from the stockmarket, you need to be putting your dividends back to work. Matthew Partridge explains.

821-Strat-1200

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.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

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.

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.

Advertisement
Advertisement - Article continues below

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.

Advertisement

Recommended

Visit/investments/investment-strategy/600637/buying-shares-can-be-a-tricky-business
Investment strategy

Buying shares can be a tricky business

A tip gone bad reminds John Stepek that buying shares in troubled companies in the hope that they can turn themselves around doesn't always pay off.
16 Jan 2020
Visit/520115/investment-trusts-the-cinderella-of-investment-arrives-at-the-ball
Funds

Investment trusts: the Cinderella of investment arrives at the ball

Investors should look beyond the market noise of a single year and examine the bigger picture. Max King explains what we can learn from 25 years of in…
8 Jan 2020
Visit/520292/passive-investing-etfs-wont-cause-the-next-market-crash
Stock markets

The boom in passive investing won’t cause the next crash

Passive investment funds such as ETFs are now such a fundamental part of financial markets that some people worry that they will spark the next crash.…
7 Jan 2020
Visit/520258/running-with-the-crowd-is-bad-for-your-finances-heres-how-to-resist-it
Investment strategy

Running with the crowd is bad for your finances – here’s how to resist it

To be a good contrarian investor, you have to avoid being swayed by the crowd. John Stepek explains how to go about it.
3 Jan 2020

Most Popular

Visit/investments/commodities/gold/600686/gold-and-silver-bull-market-2020
Gold

Want to make money in 2020? Gold and silver are looking like a good bet

If you want to make money from investing, says Dominic Frisby, it’s simple: find a bull market and go long. And in 2020 gold and silver are in a bull …
22 Jan 2020
Visit/economy/600667/money-minute-wednesday-22-january-uk-public-borrowing
Economy

Money Minute Wednesday 22 January: UK public borrowing

Today's Money Minute looks ahead to the latest on of the UK's public finances, with the Office for Budget Responsibility’s forecasts for borrowing thi…
22 Jan 2020
Visit/investments/stocks-and-shares/share-tips/600653/indias-small-and-mid-cap-stocks-are-set-for-big
Share tips

India’s small and mid-cap stocks are set for big gains – here are three to buy now

Each week, a professional investor tells us where he’d put his money. This week: David Cornell of the India Capital Growth Fund highlights three favou…
20 Jan 2020
Visit/economy/600690/money-minute-thursday-23-january-european-interest-rates
Economy

Money Minute Thursday 23 January: European interest rates

In today's Money Minute we look ahead to Christine Lagarde's second interest-rate-setting meeting at the European Central Bank.
23 Jan 2020