Jump to content
Sign in to follow this  

Smart Portfolios - Dividend Reinvestment

Recommended Posts

Compounding forms the crux of successful long term investing. It is how an asset, e.g. a share or bond, generates income which is then reinvested in the same income-generating asset, essentially creating earnings from previous earnings. Think of it as the snowball effect in its finest form.

 

Imagine that a grandparent gives both you and your twin sister £1,000 worth of shares in Golden Goose Group Plc for your 25th birthday. This company’s share price has risen steadily at 6% each year, and it pays an annual cash dividend of 4%.

When the first dividend is paid you use the £40 to splash out on a modest trip to a local pizzeria followed by the cinema. Fast forward 40 years and your shares have grown tenfold and are now worth £10,285 as a result of rising 6% each year. Your annual dividend rolls into your bank – a not to be sniffed at £411. Thanks Grandma.

 

However, at an obligatory Christmas gathering you find yourself talking to your sister about how well the Golden Goose investment has been. It transpires that back when Grandma gifted the shares, instead of taking the dividends as cash, your sister opted to have her dividends reinvested. You feel sick to the stomach when she tells you that her shares are now worth £45,259 and her latest dividend was £1,810

 

div.png

 

And that’s it really. If you multiply a number again and again by a slightly larger percentage, the difference is astonishing. Some investors may need to supplement their income with cash paid out by their investments. But if you’re in a position where you can afford to reinvest those dividends, your wealth over the long run will be substantially greater than if you choose to spend the cash instead.

 

Our Smart Portfolios automatically reinvest dividends whenever they are paid. Some providers charge you for this privilege, we don’t.

Share this post


Link to post

Join the conversation

You are posting as a guest. If you have an account, sign in now to post with your account.
Note: Your post will require moderator approval before it will be visible.

Guest
You are posting as a guest. If you have an account, please sign in.
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

Sign in to follow this  

  • Member Statistics

    • Total Topics
      12,496
    • Total Posts
      63,556
    • Total Members
      84,449
    Newest Member
    DC13
    Joined 28/09/20 03:43
  • Posts

    • Long Dax, Short NKY, Long EURJPY.  Stops beyond recent lows/high on 1 hour charts (see picture).  Betting on (temporary) reversal of recent divergence (Dax near lower end of range, NKY near upper end;  this divergence between major exporters performance in spite of weakened EURJPY does not seem sustainable.  Bet is simultaneously also on global markets breakout out of recent ranges in either direction.  JPY weakened previous weak (reversing) - may indicate that reallocation of Japanese investors' from global to domestic stocks (if any..), which could have contributed to relative NKY strength, may have peaked before (of course unless they were mostly FX-hedged).  Japan's Covid advantage may have played a major role as well in establishing the divergence, so have most likely BoJ ETF purchases.  The former should by now be "priced in" - unless Europe Covid situations worsens drastically (relative Dax overnight outperformance may confirm this).  Would expect BoJ to at least not cause itself a significant breakout of NKY to the upside, and instead keep some powder at these levels.  Timing probably not ideal after strong DAX overnight move, guess (some) retracement before/at cash open likely, however also risky to have a one-directional trade open until then, hence rather Dax stop relatively wide.  Rising EURJPY would be strong factor justifying further NKY outperformance - hence long to reduce risk.  Ideally trade should run for a bit, however review after US open (if not stopped out..).     
    • Is that a trick question..? I'm trying to have a broad picture.  And to consider (and develop an understanding of) as many influences on prices as I can.
×
×