What are Dividends?
According to Investopedia, a dividend is the distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders. Dividends can be issued as cash payments, as shares of stock, or other property.
Breaking down Dividends
The dividend rate may be quoted in terms of the £GBP amount each share receives (dividends per share, or DPS), or it can also be quoted in terms of a percent of the current market price, which is referred to as the dividend yield.
A company's net profits can be allocated to shareholders via a dividend, or kept within the company as retained earnings. A company may also choose to use net profits to repurchase their own shares in the open markets in a share buyback. Dividends and share buy-backs do not change the fundamental value of a company's shares. Dividend payments must be approved by the shareholders and may be structured as a one-time special dividend, or as an ongoing cash flow to owners and investors.
Note Unit Trust and ETF shareholders are often entitled to receive accrued dividends as well.
Why Reinvest Dividends?
Dividends should be reinvested back into the market if higher returns are your goal. Reinvesting dividends back into a stock or fund delivers a better performance compared to allowing dividends to lay idle in your account. The following graph highlights the return premium from investing in dividends over the last 5 years by comparing the high return of a dividend index against the lower return of FTSE All Share when dividends are not reinvested.
- FTSE All Share Price Return (red) returned 9.9%. This return represents the performance when dividends are not reinvested back into the market. In other words, this index is representative of someone receiving their dividend and leaving it idle in their account.
- The FTSE All Share Total Return index returned 31.2%, reflecting both capital appreciation and income (dividends) reinvested.
- FTSE UK Dividend Plus index (green) returned 43.2%. This highest-returning index underlines the advantage of dividends as the index is made up of the 50 highest dividend-yield UK stocks.
Past performance is not a reliable indicator of future results.
Source: Morningstar Direct as at 31st May 2016. All returns in GBP.
Setting up dividend reinvestment
Reinvesting dividends through your TD account is an easy way to get more shares of the company stock you already own and often at a lower cost than buying new ones.
By reinvesting dividends over the long term you can enhance both capital growth and income potential. Dividend reinvestment is not suitable for everyone. If you are in any doubt, you should seek advice from a qualified professional advisor.
How do I reinvest my dividend?
Follow these four steps to securely set up dividend reinvestment on your TD account:
- Login to your account
- Go to Accounts and select Dividend Reinvestment
- Tick the box to reinvest all eligible current and future dividends or tick the specific stocks you’d like
- Save the changes
Please note that Automated Dividend reinvestment is only available for TD ISA, Junior ISA, Trading and SIPP accounts.
What to consider
Before you jump into reinvesting dividends, take a look at the below points for consideration:
- All sterling dividends from FTSE 350 stocks can be reinvested
- It costs £1.50 each time you reinvest with a minimum investment of £10
- If you elect for Dividend Reinvestment, this will take place usually within two Business Days following payment of the dividend to your account.
- Once a reinvestment is complete, you will receive a contract note confirming the reinvestment has taken place.
Please note that share prices and dividend pay-outs in quoted companies fluctuate over time and pay-outs and share price rises are not guaranteed. We advocate thinking about this strategy over the long term and we would also encourage investing in a portfolio of shares.
The value of your investments and the income derived from them may go down as well as up. You may not get back all the money that you invest.
Login to your account today and familiarise yourself with dividend reinvestment.