Dividends paid out by UK companies in the second quarter of this year are the highest since just before the banking crisis of 2008.
This increase has been driven by banks increasing payouts as they have started to recover. It also appears in quarter two that the highest payout of dividend was made since records began. This means that an increasing amount of dividend is withdrawn rather than being left to buy more shares.
I feel that overall this development is welcome, as it appears that people who have turned to the markets for income are being rewarded. These people are prepared to move money away from the capital not at risk low interest rate environment at the banks to taking calculated risks.
Whether these people have portfolios or individual shares it is possible that they are receiving incomes that could be many times more than what can be earned on deposit, with the major oil companies currently paying six per cent and the FTSE 100 paying around 4.4 per cent.
However, some people who are receiving the dividends do not actually need the money for immediate needs. So is it worthwhile reinvesting? Many individuals do just this as it is an easy way to get more shares of the funds or company stock you already own and often at a lower cost than buying new ones. For people with a long term horizon reinvesting dividends over the long term can enhance both capital growth and income potential at a later date. An example is that if you invested in the FTSE all share index £10,000 in December 1999 and took the dividends it would be worth £10,500 by December 2014. However if you didn’t take the dividends the figure would have risen to £17,206. Over 20 years the figures are even more striking with dividends taken giving you 109 per cent return but with reinvestment giving a 305.08 per cent return.
Reinvesting dividends also achieves a smoothing effect by making a regular reinvestment for sometimes up to four times a year. This process helps towards price averaging which could work to your advantage as you may be buying dividend shares where prices are low. Also many companies grow their dividends which can add further to your investment. But if it’s an individual share you are investing into you need to have a strong awareness of it. You need to keep checking it out to make sure the company is strong with potential to grow, otherwise you could end with having made a capital outlay with reinvested dividends and the share could ultimately fail. You would then have wished that you had never invested or at least take the dividend. Therefore, it is vital to seek out an IFA to ensure you make informed decisions about the best way forward for you.