Reinvesting dividends in the UK: best platforms?

tombland

I'm looking to identify the best possible online brokerage investing platform in the UK, specifically with regards to reinvesting dividends.

I am British but resident in the USA, and I maintain a Stocks & Shares ISA in the UK from before I left the country. I've been successfully investing in stocks here in the USA for a few years now, and reinvesting dividends is a free service with most brokers here. A $50 dividend is fully reinvested and you receive $50 worth of new shares in that company at no cost. Ah, the joys of compound interest...

To my surprise I've learnt recently this is not the norm in the UK, or at least it is not with Hargreaves Lansdown – a £50 dividend that is reinvested for example is reduced quite substantially after HL take their cut and obviously this reduces the amount of additional shares I'd receive.

Is this really how it's done in the UK? Are there any online brokerage investing platforms in the UK that are more investor-friendly? I've seen the comparison at Monevator but reinvesting dividends is strangely not a factor in the table.

Any advice would be great!

bigfreddiel

Well I pay £1.50 to reinvest automatically, bit of a rip off, but fairly typical as far as I know fj

hoc

Sadly, free dividend reinvestment isn't the norm in the UK. Other than fund trading on certain (expensive % based) platforms, I'm not sure there is anything "free" in UK platforms. I say this, in comparison to, for example many (most?) US platforms offering free purchase of major ETFs.

My provider (AJ Bell/Youinvest) were hinting they would introduce dividend reinvestment but given the latest direction in their fee structure if they do start offering this service it probably wouldn't be free.

JohnRo

The only way I've managed free dividend reinvestment is to add the accumulated dividends in the account cash pool to my scheduled purchases.

Since I'm making purchases anyway, the dividend is entirely reinvested when using ETFs or loses just 0.5% in stamp duty for ITs and shares.

Of course if you aren't making planned/regular contributions then this won't help.

slowpoke_rodriguez

HL is the only one I've found that re-invests dividends "cheaply".
They charge 1% (min £1) per re-investment.
I'd love to know if there were others...

george4064

slowpoke_rodriguez wrote: »

HL is the only one I've found that re-invests dividends "cheaply".
They charge 1% (min £1) per re-investment.
I'd love to know if there were others...

Same here with HL.

The dividend re-investment charge is actually 1%, min. £1 and max. £10.

EdGasket

Reinvesting is pointless. If all shareholders reinvest their dividend then they would own just the same % of the company after the dividend as before the dividend and have no extra cash. Therefore a completely pointless exercise.

bigfreddiel

EdGasket wrote: »

Reinvesting is pointless. If all shareholders reinvest their dividend then they would own just the same % of the company after the dividend as before the dividend and have no extra cash. Therefore a completely pointless exercise.

Garbage, dividend reinvestment is where the growth of a portfolio comes from, not from any increase in a shares value, although this of course is a factor.

For example:

£10k invested in FTSE 100 in 1999 would have shrunk to £9,137 without dividend payouts

But £10k invested would be worth £15k with dividends included

Cheers fj

jimjames

george4064 wrote: »

Same here with HL.

The dividend re-investment charge is actually 1%, min. £1 and max. £10.

iWeb is 1% with a maximum but no minimum.

Eco_Miser

EdGasket wrote: »

Reinvesting is pointless. If all shareholders reinvest their dividend then they would own just the same % of the company after the dividend as before the dividend and have no extra cash. Therefore a completely pointless exercise.

That would be impossible, unless the company issues more shares, in which case the company would actually have more assets.

In the normal situation, some shareholders invest their cash (from dividends), and own more of the company, and other shareholders sell some of their shares, and have more cash - just as happens on every trading day that dividends are not issued.

bowlhead99

EdGasket wrote: »

Reinvesting is pointless. If all shareholders reinvest their dividend then they would own just the same % of the company after the dividend as before the dividend and have no extra cash. Therefore a completely pointless exercise.

There are a finite number of shares in issue. So, as owners of the business, having received a share of the company's cash as dividends, all shareholders cannot reinvest their dividends in buying further shares - because who is going to sell them further shares if all the shareholders are buying more shares with their cash, rather than selling?

You essentially have two choices.

a) If you take the dividend payout and spend it on / invest it in something else, you still own the same % of the company after the dividend as you did before the dividend, because your ownership interest in the company does not fall simply by you and everyone else taking some of the company's cash as a dividend. So you still own the same fractional share in the company (e.g. 0.001%) but you have less of your total wealth invested in the company because some of the company's assets got paid out into your pocket and then got spent on / invested in something else.

b) But if you take the dividend payout and use the cash to buy more shares in the company, you will own a greater % of the company after the dividend than you did before, because you own more of the total shares in issue (e.g. 0.00103% instead of 0.00100%)

If you wish to retain the same portion of your total wealth exposed to the company or fund which just paid you a cash dividend, then you should spend the cash dividend on buying more shares in the same company or fund that just sent you that cash. However, you may find that the movement in the share price has meant that your shares in that company or fund now represent a greater portion of your wealth than you had initially intended, and so the correct move is quite possibly to spend the cash dividend proceeds on buying other assets instead.

bigfreddiel wrote: »

Garbage, dividend reinvestment is where the growth of a portfolio comes from, not from any increase in a shares value, although this of course is a factor.

The growth in the portfolio value comes from the companies within it, making profits and demonstrating that they will continue to make profits into the future. This grows their assets and their share value which is driven by a combination of the asset value and positive perceptions of what might happen to those assets in the future.

Working against the growth of a company's share price is the fact that the company keeps taking its cash and handing it out to its investors, reducing the value of the company by giving the profits away as dividends. Clearly if you take all those dividends you receive and pi.ss them up the wall, your portfolio will not grow, because you are constantly taking money out of it.

It seems to me to be a misconception to quote the old wives' tale that companies generally do not grow because they grow, but because you reinvest dividends into them. When you reinvest a received dividend in your broker account you are buying more shares on the market - you are not giving the company any more money. Most of the growth of the company's value comes from it making profits and people wanting to own it. Your share of the company is a tiny inconsequential one, and it will carry on growing whether you reinvest in that company or a different company.

So, the effect you are noticing when your portfolio grows is that the companies in it, make profits and grow. That's where portfolio growth comes from. The idea that most of it comes from compounded dividends is a red herring. Clearly, your choice to reinvest the dividends rather than spending it down the pub stops your portfolio contracting which would be counterproductive if you wish to get a large portfolio because it would cancel out a lot of the growth. So don't take the money down the pub.

It is not some 'magic of reinvested dividends' that grows the portfolio, simply that taking out and spending your dividends on things other than investments would rip down the growth that was developing in your portfolio. That would be unhelpful. So, don't take money off the table simply because the opportunity presents itself by way of a dividend cheque. In other words - it's not so much that investing dividend grows the portfolio, but that taking money out of the portfolio would ungrow it.

Of course, assuming for simplicity that all companies on average develop their total return at the same pace, it does not matter whether you reinvest into the company which just paid you a dividend, or into a different company which you might or might not have already owned. As companies and funds fluctuate in value incessantly and in quite a haphazard way, if you have a broad portfolio which you have not rebalanced in the last week or two, it's quite unlikely that the company that just paid you the £50 dividend is the one in your portfolio which is most in need of a top up to create your perfect balanced portfolio asset allocation at that exact moment.

So you do not need to auto reinvest the money to benefit from some sort of amazing magical properties of compound growth through reinvested dividends. It is simply important to avoid frittering the money away on rubbish which would cripple your otherwise-growing portfolio.

As an example of frittering away on rubbish, I would include not just nonproductive assets like beer and pizza, but also 'dividend reinvestment fees'. If it costs you £2 to reinvest your £50 company A dividend in August and £2 in to reinvest your £100 company B dividend in October, you are better off waiting to October and spending the £2 dealing fee to buy either £150 of company A or company B. Delaying the £50 purchase by a couple of months has saved you a £2 fee, which was 4% of your £50 dividend. The saving is equivalent to over 20% a year on the reinvested money if annualised.