Reinvesting dividends earned from investments can supercharge savings over the long term, according to fund managers.
The strategy is an easy way to grow wealth and is simple to set up and manage, says Fidelity International investment director Tom Stevenson.
The first step is picking the right funds.
Go for accumulation rather than income as any dividends are automatically reinvested.
You can spot the difference between income and accumulation funds as they have ‘inc’ or ‘acc’ in the name.
Next, set up a regular investment plan.
Reinvestment beats income
To show how the reinvestment strategy works, Fidelity International worked the figures out for someone saving £100 a month in a FTSE All Share fund over 10, 20 and 30 years – starting in April 2006.
The analysis revealed the longer the cash is invested, the bigger the gap between savings that did not reinvest dividends or cash earning interest in a bank.
Over a decade, an investor taking dividend income would have a portfolio worth £13,600 – but this would be boosted to £16,448 if the dividends were reinvested. In comparison, putting the money in the bank would have seen a savings pot of £12,181.
Over 20 years, the portfolio without reinvestment would be £30,645, cash savings £26,382 but the supercharged reinvested portfolio would be £44,818.
The figures are even more dramatic over 30 years., with the reinvested portfolio worth double that of the non-reinvested portfolio.
Lower for longer strategy
The total invested is £36,000 – but this turns into £132,368 with reinvested dividends, more than double the £65,723 of a non-reinvested portfolio. Both knock the comparable bank savings of £49,404 into a hat.
Reinvesting dividends is a simple way for investors to boost the value of their portfolios, explained Stevenson.
“In the current lower-for-longer interest rate environment, investing in income-paying shares continues to be a very attractive option for many people with extra money to save,” he said.
“Selectivity remains key, however, not least because dividends have been under pressure of late. It pays, therefore, to put your money with an experienced fund manager who has been through a few market cycles and is able to identify companies that pay not just high but also sustainable income.”