Here’s How Dividends Can Turn £9,000 Into £179,000

Not convinced that buying shares and reinvesting dividends is a winning strategy? Read 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.

I know I keep banging on about how investing in shares is the best form of investment ever, and how reinvesting dividends can make an enormous difference to your total returns. But even now, many years after I first learned of the Barclays Equity-Gilt Study, I’m still amazed at just how much better it is to buy shares than to save your cash in a bank account.

Wait, the Barclays what? It’s a survey that compares the returns from shares, from cash in a savings account, and from gilts, every year since 1899 — and you can’t get a much more of a long-term approach than that!

Too scary!

It’s understandable that people shun the stock market over fears of losing all and instead keep their money safely in a savings account, especially after the recent financial crisis and the turn-of-the-century dotcom boom and bust. But if you have a couple of decades or more ahead of you for your investments to mature, that could be a very costly mistake.

There certainly is more risk attached to buying shares in the short term, but the risk evens out over the long term — and the longer you have, the more the risk fades way.

What the folks at Barclays have been doing is comparing rolling periods from up to the present day — that’s the periods 2004-14, 2005-15, 2006-16, and so on. And what they discovered is that over all the rolling 10-year periods of the study, investing in shares beat saving in cash 91% of the time. So if you’re looking at a 10-year horizon, the odds are strongly stacked in your favour.

Can’t lose?

But a 9% chance of losing out to cash is still significant, so how about longer periods? Well, they only had to extend the rolling periods to 18 years to get a 99% chance of shares beating cash, and that’s surely enough for most people, isn’t it? If that’s still not enough to steady your nerves, we don’t need much more to settle the matter once and for all.

You see, when Barclays examined 23-year periods, they found that shares have never been beaten by cash — not even once. And that includes all periods spanning the banking crisis, the dotcom crash… and even the great 1929 crash that allegedly had investors throwing themselves out of tall buildings. And if that doesn’t convince you, well I give up.

Dividends make the difference

But what about those dividends? Investors always have the option to either take their dividends or to reinvest them for the long term, and it can be tempting to enjoy a bit of cash while your shares appreciate in value. In fact, if you’d invested £100 in the UK stock market in 1945 and spent all the dividends over the years, you’d still have a very nice £9,148 after adjusting for inflation — more than 90 times your original investment.

But if you’d reinvested all your dividends in buying new shares, you be sitting on an inflation-adjusted pot of… wait for it: £179,695!

It was Albert Einstein who famously said that “compound interest is the eighth wonder of the world“. And he wasn’t stupid.

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.

More on Investing Articles

Investing Articles

Here’s how much I’d have if I’d bought 1,000 shares in this FTSE 100 defence stock 5 years ago

I could have made a pretty penny investing in this leading FTSE 100 defence stock. Now I’m looking at a…

Read more »

Investing Articles

1 potential millionaire-maker UK stock I’d like to buy for the long haul

For long-term investors, here’s 1 UK stock to consider buying right now with the potential to help power a growth…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

These cheap UK shares look way too good to ignore right now

With the UK stock market reaching new highs recently, this Fool plans to grab these two remaining cheap shares before…

Read more »

Young Woman Drives Car With Dog in Back Seat
Investing Articles

This unloved UK stock could rise 120%, according to a City broker

Some City analysts reckon a once-popular UK stock can recover from its massive recent decline and go on to more…

Read more »

Investing Articles

These FTSE dividend shares all offer 6%+ yields!

Paul Summers highlights three FTSE dividend shares that offer big yields. But is the passive income stream sufficient to offset…

Read more »

Young black colleagues high-fiving each other at work
Investing Articles

Is Legal & General Group one of the FTSE 100’s greatest value shares?

Legal & General shares boast low P/E ratios and massive dividend yields. Could they be one of the London stock…

Read more »

Front view photo of a woman using digital tablet in London
Investing Articles

I’m looking for the best FTSE 100 value stocks to buy now. Have I found them?

Barclays, NatWest, and Imperial Brands shares are recovering strongly. But these FTSE 100 stocks still trade on rock-bottom earnings multiples.

Read more »

Businesswoman analyses profitability of working company with digital virtual screen
Investing Articles

Where on earth will Nio stock be in 1 year?

Nio stock has demonstrated extraordinary volatility over the past 12 months, but where will it be in a year's time?…

Read more »