Reinvesting key to long term savings

Mon 17 Jan 2011

Reinvesting dividends allows investors to benefit from compounding.

Across the UK 67.8% of investors reveal a tendency to reinvest their dividends with the highest proportions in Wales and Scotland where close to three-quarters of shareholders are more inclined to reinvest; whereas, investors in Northern Ireland and the Midlands are most likely to take dividends as cash.

Average UK share dividend payments topped £250 in 2010 - equating to approximately 2.5% of an average UK share portfolio of £9,780 - according to Equiniti, the UK’s leading share registration and financial services business process outsourcing (BPO) specialist.

Reinvesting dividends allows investors to benefit from compounding.

Equiniti Investment Services Director, Mark Taylor says; "I can understand why some people may take the money, but by taking a long-term view of shares and dividends with regular top-up investing, perhaps through a direct debit arrangement, is one good way of building up a reasonable nest egg for the future.”

For example, any dividend reinvested pre-2010 in the FTSE 100 Index would have reaped an additional return of 9.0% as a result of the rise in the index for the year ending December 31, 2010.

On the flip side the third of investors (32.2%) who tend to take dividends as cash payments may lose out in two ways:

  1. Spending dividend payouts over saving removes the return from future share dividend payments that would apply to the additional shares bought as a result of reinvesting.
  2. The recent VAT rise by 2.5% to 20% is a tax on consumption; spending rather than saving costs investors more in 2011.

The findings stem from Equiniti research of more than 1,300 active investors in late 2010 that revealed a number of interesting behaviours. 

Mr Taylor says; “Many people prefer money in their pocket today over the promise of future payment, however the impact of interest compounding over time is how investors may benefit in the long term.”

As background, Londoners, on average, have the largest share portfolios averaging over £25,000 followed by investors in South West England and in Wales.

Equiniti’s research also revealed that investors on average hold shares in five separate companies, with investors in London and Northern Ireland most diversified with 5.8 and 6.2 respectively.

Whereas, investors in the Midlands and North East have the least diversified portfolios with 4.3 and 4.4 companies on average, respectively.

“Portfolio diversity is critical to managing risk for investors. The old adage of all eggs in one basket is so true when it comes to shares. Investors need to understand how they can spread risk,” Mr Taylor says.