Dividend Magic
Pedestrian as they can appear, dividends end up doing much of the work for long-term equity investors.
According to latest estimates, investors in UK-listed companies were on track to receive £94 billion in dividend pay-outs from companies last year, according to Capita Dividend Monitor1
– a record high.
Yet even in a good year, dividends can appear unexciting – at best, they offer only a few pence on the pound. Then there are the lean years, when a company might not pay anything at all; in the aftermath of the fi nancial crisis, several major banks simply couldn’t afford to. Even if they do pay out, the impact of dividends on your total capital barely seems to move the dial – in the short term.
Yet over the long term something miraculous begins to happen, something that Albert Einstein reportedly named as man’s greatest invention and called “the eighth wonder of the world”.2
That something is
compound interest; and reinvesting dividends achieves a similar effect. The power of compounding lies in the exponential rate at which it increases the value of the initial capital sum over time.
It certainly pays off. Data provided by Morningstar/ Ibbotson shows that, between 1926 and 2009, share price appreciation on the S&P 500 averaged 5.47% per year, while dividends delivered 4.13% per year. In short, dividends delivered more than 40% of the total return for investors.3
One of the more remarkable implications of this compounding-via-dividends effect, is that a temporary fall in the share price can in fact have a silver lining. So long as the company continues to pay a dividend, then the shareholder who reinvests his or her next payment will receive a greater number of shares as a result. Not only does this help to balance out the loss in capital
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value; it also means the investor is effectively buying up more shares when they are cheaper, yet doing so without committing fresh capital.
As for the size of dividends themselves, fi gures published in 2017 by Barclays Capital show that dividend growth has remained relatively sustained since World War II. Five-year growth only dipped briefl y into negative territory in the aftermath of the tech bubble – growth even persisted in the aftermath of the global fi nancial crisis.4
The same report shows that, had you invested £100 across UK stocks in 1899, but without reinvesting the income, then, in infl ation-adjusted terms, you would end up with £195. If, on the other hand, you had reinvested all the dividend income generated, the fi gure would be £32,051.5
In short, dividends are far more than a seasonal bonus. Over the long haul, they can even end up
doing most of the work. 1
http://www.capitaassetservices.com/dividend- monitor-q3-2017 2
It is far from clear that he said either of these things, but they have been attributed to him for decades 3
Barclays Equity Gilt Study 2017, page 145
http://business.time.com/2010/02/08/dividends-vs-capital- gains-which-is-better/ 4, 5
Please visit my website or contact me to receive a complimentary guide covering Wealth Management, Retirement Planning or Inheritance Tax Planning.
Scott Symes
APFS DipPFS DipFA CeMap Chartered Financial Planner
01202 951227 07885 899742
scott.symes@
sjpp.co.uk www.scottsymeswm.co.uk
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