How do dividends work in simple terms.

TheTruthSeeker

Good-day folks.

If an investment fund pays £1.883 per year (I know it can change), and you have 100 shares @ £158.49 per share (£15,849). The end of the year comes around and the fund pays out £1.883 per share you have? £188.3 for a £15,859 investment? This seems awfully low return for nearly £16,000. That's barely 1.1% return.

Is this correct? What if the fund ends the year -5%? What will the dividends be then? What if the fund has an awesome year and rises by 40%, then what?

A savings account pays 2% per year I can understand this, it's common sense for me but I don't get how dividends are valued and why they're so low considering the fund itself is performing around 11% annually.

For those of you wanting to know the figures and fund. I'm pulling this information from Vanguard Life Strategy 60% Equity. Though the same question can be applied to any other fund really.

Sorry for the lack of knowledge, I just don't get how it works and why the payout seems stupidly low.

xylophone

http://monevator.com/using-vanguard-lifestrategy-funds-life/

http://www.hl.co.uk/funds/fund-discounts,-prices--and--factsheets/search-results?investment=&category_list=CEHGINOPW&companyid=&sectorid=131

Vanguard lays more emphasis on capital growth?

Linton

Companies make profits. They can do several things with these profits one of which is to give the money back to the owners (the shareholders) as dividends. Another is to reinvest the money into the company. Companies which naturally generate cash but do not have the opportunity for high growth such as utilities are more likely to pay high dividends whilst those dependent on expensive investment to stay in business such as IT or biotech companies are more likely to reinvest profits.

Unit trusts/oeics receive dividends from companies in which they invest. These funds must either reinvest the dividends in the fund (ACC funds) so increasing its unit price or pay the dividends out to the unit holder (INC funds). So the dividend you receive from your fund is determined by the sort of companies the fund holds. Very broadly the more you take in dividends the less you get in growth and vice versa. This is one reason for taking a detailed interest in the sort of companies your chosen fund invests in.

Investment trusts have much more flexibility in paying out dividends.

AnotherJoe

TheTruthSeeker wrote: »

Good-day folks.

If an investment fund pays £1.883 per year (I know it can change), and you have 100 shares @ £158.49 per share (£15,849). The end of the year comes around and the fund pays out £1.883 per share you have? £188.3 for a £15,859 investment? This seems awfully low return for nearly £16,000. That's barely 1.1% return. You forgot the 11% growth you mention below. That's 12.1% return overall! .

Is this correct? What if the fund ends the year -5%? What will the dividends be then? What if the fund has an awesome year and rises by 40%, then what? The dividend will largely remain the same. The fund is buying shares which in the main grow through appreciation. So in the latter case you'd have had 51.1% growth, so getting sniffy about the low dividend would seem churlish !

A savings account pays 2% per year I can understand this, it's common sense for me but I don't get how dividends are valued and why they're so low considering the fund itself is performing around 11% annually. Basically, think "cake and eat it". Did you want your growth as dividends or price appreciation?

For those of you wanting to know the figures and fund. I'm pulling this information from Vanguard Life Strategy 60% Equity. Though the same question can be applied to any other fund really.

Sorry for the lack of knowledge, I just don't get how it works and why the payout seems stupidly low.

The payout was 12.1% overall. If you want it, sell 11% of the shares. (Yes I realise mathematically that's not exact

If you had the ACC version of these shares they would have gone up in price by 12.1% but paid no dividend at all. If you are just starting out investing then the ACC version is probably the ones for you. Avoids the inconvenience of reinvesting the income.

If income is what you want you should look for investments that are aimed at producing income. Generally that's in the name of the fund. You'll see much lower price growth though.