5 facts you didn’t know about dividends

Earning good dividends from your investments and reinvesting them can make a huge difference to your overall returns — perhaps a lot more than you’d think.

Here are five facts about dividends that you might not know:

1. Dividends beat savings account interest hands down

If you’re looking for income, you can get much better returns from dividends than from a savings account, especially in these low-interest times. Sure, some companies pay low dividends, and some don’t pay any, but if you look among the top FTSE 100 companies you can find plenty of big ones.

BP, for example, is offering more than 6% per year, as are Legal & General and SSE. If you started with just those three you’d be well on your way to a great dividend portfolio — and you won’t get anything like those long-term returns from a savings account.

2. Dividends are steadier than share prices

Where share price performance can be erratic, returns from dividends are usually steadier and often get you more cash.

Look at GlaxoSmithKline, for example. It’s been going through a turnaround plan to get its drug development pipeline up to full speed, and over the past five years the share price has fallen by 13%. But you’d have had around 25% in dividends over that period, and you could have used the cash to buy more shares in anticipation of a price rise once the forecast return to growth materializes.

One way to invest without worrying is to go for good dividends, and then see share price rises as a bonus extra.

3. Reinvesting dividends can multiply your profits

According to the Barclays Equity-Gilt Study, if you’d invested £100 in the UK stock market in 1945 and taken all the dividends out as cash over the years, and spent it, the value of your shares would have risen to more than £9,000 by today after adjusting for inflation.

But if you’d reinvested all your dividends in buying new shares, instead of spending the cash, you be sitting on an inflation-adjusted pot of, wait for it… nearly £180,000!

4. A progressive future dividend can be more profitable than a big one today

It’s always tempting to go for the biggest dividend yields available today. And that makes intuitive sense — a 6% dividend will net you a lot more money over the long term than a 4% one, won’t it?

Well, not necessarily, because it all depends on how the dividend progresses in the future. If that 6% one stays unchanged, and the 4% one is lifted by 10% every year, in 10 years time that original 4% dividend will be yielding 10% (based on your original purchase price).

In addition, a companythat’s able to grow its dividends every year is more likely to see its share price rising too, which will boost your total returns.

5. Apple will pay enough in dividends in 2017 to buy Old Mutual

Despite famously not paying dividends for years, Apple is currently shelling out $3.2 billion per quarter, which will amount to $12.8 billion over the full year (or more, if the dividend is lifted further before the year is out). At current exchange rates, that’s £10.3 billion, which is just about enough to buy the whole of FTSE 100 insurer Old Mutual.

In fact, there are only 40 companies in the whole of the FTSE 100 that are currently too expensive for Apple to buy… out of its dividend cash alone!

That really does show the power of dividends.

You can become a dividend millionaire

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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended Apple and GlaxoSmithKline. The Motley Fool UK has recommended BP. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.