Why Reinvesting Your Dividends Is The Best Decision You’ll Ever Make

Dividend reinvestment is a great way to achieve market beating returns without much effort.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Dividend reinvestment is a great strategy for building wealth. However, many investors neglect this simple strategy.

Spring-loaded returns

Indeed, reinvesting your dividends can provide market-beating returns through periods of market stagnation or turbulent economic times. For example, the dot-com boom of the late 90s took the FTSE 100 to an all-time high of 6,930. Unfortunately, since then the market has not been able to surpass these highs and has suffered a decade of serious turbulence. 

For many long-term investors, this has been a painful experience as their returns will have been negative during the 14-year period. What’s more, if we include the effects of inflation, the figures look even worse.

However, if we include dividends received during this period then the FTSE 100 would stand at a staggering 9200, 33% higher than its current level. 

Bigger is not always better

Nonetheless, dividend investing is not as easy as it might seem at first. While many investors will seek out a large dividend yield it is often the case that bigger is not always better. Indeed, many factors such as the company’s payout history as well as dividend cover should be considered. 

A prime example of this is Halma, which produces safety products for a range of applications worldwide. Halma only offers a dividend yield of 1.9% right now but the company has maintained this payout for 34 constitutive years. What’s more, the payout has grown 14-fold since 1990.

Furthermore, Capita (LSE: CPI), which currently offers a lowly yield of 2.5%, has a 30 year history of double-digit dividend payout and earnings growth. Capita is in prime position to continue this payout way-out into the future as the company is the UK’s leading provider of outsourcing solutions. Capita’s outsourcing contracts usually last a number of years and lock in future revenues, making the company’s cash flow predictable and supporting future dividend payouts. 

A winning combination

Having said all of that, there are many companies that currently offer a solid dividend yield above the market average of 2.8%.

Right now, the standout candidate is Royal Dutch Shell (LSE: RDSB) (NYSE: RDS-B.US), which currently offers a yield of around 5% and has a dividend history that stretches back more than 60 years. Shell has one of the longest dividend histories in the world and this should continue as the company owns enough oil reserves to guarantee production at current rates for around 20 years. As oil becomes harder to find and its price increases, Shell’s profits should only grow, underlining future dividend payouts.

AstraZeneca (LSE: AZN) (NYSE: AZN.US) is also a great candidate, with a current yield of 5.3%, Astra has been paying and increasing its payout around 12% annually since 1986. Nonetheless, many investors are concerned that Astra’s payout could come under pressure as the company loses the exclusive production rights to a number of treatments during the next few years. Still, the company’s payout was covered twice by earnings during 2012 and Astra is working hard to increase its development pipeline. So, the company’s dividend currently looks safe. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

> Rupert owns shares in Royal Dutch Shell. 

More on Investing Articles

Person holding magnifying glass over important document, reading the small print
Investing Articles

The market is wrong about this FTSE 250 stock. I’m buying it in April

Stephen Wright thinks investors should look past a 49% decline in earnings per share and consider investing in a FTSE…

Read more »

Black father and two young daughters dancing at home
Investing Articles

1 FTSE 250 stock I own, and 1 I’d love to buy

Our writer explains why she’s eyeing up this FTSE 250 growth phenomenon, and may buy more shares in this property…

Read more »

View of Tower Bridge in Autumn
Investing Articles

The FTSE 100 is closing in on 8,000 points! Here’s what I’m buying before it’s too late!

As the FTSE 100 keeps gaining momentum, this Fool is on the lookout for bargains. Here's one stock he'd willingly…

Read more »

Investing Articles

3 ideas to help investors aim for a million-pound Stocks & Shares ISA

The UK has a growing number of Stocks and Shares ISA millionaires, and this plan may be one of the…

Read more »

Illustration of flames over a black background
Investing Articles

2 red-hot UK growth stocks to consider buying in April

These two growth stocks are performing well, but can they continue to deliver for investors through 2024 and beyond?

Read more »

Charticle

Is JD Sports Fashion one of the FTSE 100’s best value stocks? Here’s what the charts say!

The JD Sports Fashion share price remains a wild ride during the first quarter. Could it be one of the…

Read more »

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »