The benefits of reinvesting your dividends

Julie Brownlee, Fsp Invest, 14 Jul. 2014

Tags: dividends, reinvesting dividends, reinvest dividends, benefits of reinvesting dividends, investing strategy, investment strategy, compounding, emotional benefits

If you’re looking to generate an income from your investment, investing in dividend paying shares is one way to do just that.

But what if you didn’t take the dividend as income and reinvested it instead? Let’s take a closer look…

What is reinvesting dividends all about?

When you invest in dividend paying shares, instead of taking that money and using it for other purposes, you could buy more shares instead.

What this does is allow your investment to benefit from compounding. It causes a snowball effect on your investment.

Have a look at the chart of the FTSE All Share Index below…

Chart showing benefit of reinvesting dividends

If you’d invested £100 back in December 2000 in the FTSE All Share Index, your investment would now be worth £122.

But if you’d reinvested any dividend payments you got, your £100 investment would now be worth £192.

And when it comes to reinvesting your dividends, the longer the timeframe, the better the results.

For example, if you’d invested £100 at the end of 1985 and reinvested your dividends, your investment would now be worth £1,520! That equates to a 10% annual return.

But if you’d chosen to take the dividend payments, your investment would now only be worth £532.

The emotional benefits of reinvesting your dividends

By opting for this type of investing strategy, it makes you look at the dividends a company is generating rather than what’s happening with its share price.

And when shares fall in value, it makes the strategy even more efficient. Your dividend money will buy even more shares. Over time this could lead to better returns and more dividends.

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This strategy forces you to take a long-term look at the stock market.

So there you have it, the benefits of reinvesting your dividends.

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