The simple strategy that could double your returns

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Investors are often encouraged to reinvest their dividends rather than take the cash and new research from Fidelity International reveals why.

It shows that an investor who invested £100 a month in the FTSE All Share index over the past 10 years and chose to take the income would be sitting on a savings pot of £13,600.

But had the same person in the same situation reinvested the dividends and bought more shares, the portfolio would now be worth £16,448 – a difference of nearly £3,000.

Over 20 years, the difference between the portfolios is even starker.

In this scenario, someone who wanted to take the income from their investment would now be left with a portfolio worth £30,645. If they instead reinvested their dividends their pot would have grown to £44,818.

But the true power of compounding is realised over 30 years. The investor who chose to take their income would have a portfolio worth £65,723, while the portfolio of those who chose to reinvest their dividends would be worth a whopping £132,368 – over double the return.

Tom Stevenson, investment director for Personal Investing at Fidelity International, said: “Reinvesting your dividends is one of those age-old investment strategies you can adopt to boost your wealth, especially when coupled with the phenomenon of compounding.

“The critical component here is time. It is the key factor of compounding and the reason why you should start to save as soon as you can. By investing regularly and reinvesting income over the long term, our figures show that this approach can help you double your returns.”

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