Interest vs dividends

jimjames

It's also important to bear in mind that dividends are quoted on the current share price.

So if you invest £1000 in shares that pay 4% (£40 per year) and over the next 10 years the value of them increases to £2000 and they are still paying 4% dividend yield so you now get £80 per year. Then that's effectively 8% yield on your original investment as well as the increase in value.

polymaff

TheSpaceMan wrote: »

I still don't think I understand. So with a fund or investing directing into a company, you don't get any interest whatsoever, instead you get dividends which could range from 0% to 50% or more depending on that particular companies dividends for that year right?

So even if your fund loses 3% you could still make money because the dividends payout? And on the flip side your fund might go up 10% for 1 year but those companies don't pay that much dividends that year?

Just give me some example figures, I know it obviously varies but just to get an idea.

Folk invest to make money.

When you lend money - to a government, bank, building society or company they pay you interest as a compensation for your temporary loss of use of the money. That's savings

When you buy shares in a company you make money through dividends and/or increases in the share value.

Google "anglo american share price" then click on the "5 years" tab of the share price graph. In the data below the graph you will see that the Dividend Yield is currently 7.71%. That looks pretty good compared to current savings rates - but then look at the graph and you'll see a significant fall in the share price. You'll also find start-ups with exactly the opposite profile - soaring share price but nugatory dividends. The trick is to spot the shares that will give you the right mix of income via dividends and capital growth via the share price to meet your plans for your near and far future.

With savings - especially fixed rate savings - you'll have some confidence as to how much you may make. In shares you need to have confidence in your, and/or your fund manager's, foresight.

Biggles

polymaff wrote: »

When you buy shares in a company you make money through dividends and/or increases in the share value.

It is a myth that you make money through dividends. Dividends are only paid to you out of the assets of the company you already own; if a share is priced at 100p and pays you a 5p dividend, the share price drops to 95p (all other things being equal) to take account of it (on the 'ex-dividend' date). You have made nothing on that date, just converted a capital gain to income.

There are two usual reasons for choosing a company on the basis of the dividend it pays: you may wish to take an income from your shareholding, so the dividend can be paid to your bank. Or you may prefer to take some of the share price as a dividend for tax reasons (eg to avoid/reduce CGT). Some people also use the yield as an indicator of the company's healthy cashflow.

My shares are all now in an ISA, so it makes no difference to me how profits accumulate as long as my ISA keeps growing. I usually go for 'growth' share, so hardly any of my most profitable shares, over the years, have ever paid a dividend.

Pincher

Look at it this way, from April 2016, you get £5,000 worth of dividends tax free, but only £1,000 interest tax free.

What with Santander 123's 3%, Tesco Current A/C, A couple of 6% Regular Savers, the £1,000 tax free interest is spoken for.

Gear up for some dividends, to welcome in the £5,000 tax free allowance.

Thrugelmir

Biggles wrote: »

My shares are all now in an ISA, so it makes no difference to me how profits accumulate as long as my ISA keeps growing. I usually go for 'growth' share, so hardly any of my most profitable shares, over the years, have ever paid a dividend.

Around 60% of share returns is made from reinvesting the dividends. I use dividends to diversify my holdings. Majority of companies rise and fall from grace over time.

Pincher

On rise and fall of shares.

If you were forced to sell shares at a loss, you can carry forward the loss to future years, to offset gains, using your tax return: but not if the shares were held inside an ISA!

So holding high risk shares inside an ISA is a tactical mistake.

I try to buy steady and boring shares in an ISA.

Biggles

Pincher wrote: »

If you were forced to sell shares at a loss, you can carry forward the loss to future years, to offset gains, using your tax return: but not if the shares were held inside an ISA!

So holding high risk shares inside an ISA is a tactical mistake.

Sadly, my biggest tactical mistake was that my gains, after any losses, still exceeded the CGT threshold. I'll know better in future.
;-)

Thrugelmir

Pincher wrote: »

So holding high risk shares inside an ISA is a tactical mistake.

If you find that elusive 10 bagger then it should be inside an ISA. Sounds as if you simply pick losers.