Simple calculations show the benefit of reinvesting dividends
Investing £100 a month in the FTSE All Share index over the past decade and drawing on the income means you would now be sitting on a savings pot of £15,626.
But had you instead reinvested the income return, your portfolio would now be worth £18,977, according to calculations from Fidelity International.
Over a longer investment time period (20 years) the difference in the value of the two portfolios is even greater.
Taking an income would mean you would be left with a portfolio of £34,522 while reinvesting income over the two decades would mean your portfolio stands at £50,811, a difference of over £16,000.
Over 30 years and the magic of compounding, £100 a month invested would give a portfolio worth £71,877. But it would be worth double (£143,443) if the income was reinvested.
Fidelity International said in all three scenarios, you would be significantly worse off had you kept your money languishing in cash rather than investing in the stock market.
|Total amount invested in the FTSE ALL Share||Dividends reinvested||Dividends not reinvested||Difference between the two portfolios||Cash (Average UK savings account)|
Source: Fidelity, July 2017. Returns as at 30 June 2017
Maike Currie, investment director for personal investing at Fidelity International, said: “Dividends really do matter. While they are obviously attractive to someone in need of a steady income, to really get the most out of income-paying stocks you need to re-invest your dividends. The answer to understanding why ploughing back any dividends can be so powerful lies in the magic of compounding.
“It has been claimed that Albert Einstein labelled compound interest ‘the eighth wonder of the world’. To work it requires two things: time and the reinvestment of returns. By starting early and reinvesting income over the long term, you can really supercharge your investment returns.”