Reinvesting dividends in the UK: best platforms?

bowlhead99

tombland wrote: »

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?

Generally, yes it is how it's done.

There are some which offer special deals such as HL or IWeb who have a small percentage-based fee with a cap which will reduce the cost to well below their standard transaction fee for placing a purchase order; TD Direct have a flat fee of £1.50 for qualifying shares if you have £10+ of qualifying dividends to reinvest, although they don't offer it on shares in all companies because the smaller more obscure ones are not going to have enough customers actually wanting to participate in a 'bulk buy' to allow them to offer lower rates.

There are also several that allow you to use a 'regular investment' program to buy your preferred shares on a fixed day each month at some nominal fee like £1.50 or £2 if you set it up in advance. And many have fee structures where mutual funds are free to buy (paying via annual asset-value-based fees instead) so if you spend your dividends on buying funds there are no transaction charges. But generally if what you want to buy is exchange-traded, your UK broker will want a fee for going out and spending your money to buy you more shares on the exchange.

By contrast in the US, I think there are more company-sponsored DRIPs (dividend reinvestment programs) where the companies support the brokers in their efforts to put money back into the same stock; and brokers want to be seen to offer free/cheap reinvestment because their rivals do it.

Still, a £1 / 1% charge at HL is presumably not going to break the bank. If they take a percent off your dividends which are themselves a percent of the value of the company, that's one basis point and pretty inconsequential. If you don't like it, simply save up your dividends to do one large purchase rather than auto-reinvesting a few small scraps each month. If they charge you the minimum £1 on a £50 dividend, that's 2%, but still pretty inconsequential and still not worth the hassle of jumping to a different provider, particularly as a non-UK resident's experience of trying to open up a new ISA account is likely to be fraught with stress - most brokers will not want you, or if they do, you may not be able to use their standard online account opening form to do it.

I've seen the comparison at Monevator but reinvesting dividends is strangely not a factor in the table.

Way more useful to you as an addition to that table would be whether the company in question will take new customers who are US resident rather than UK resident; this will close a number of doors to you.

EdGasket

bowlhead99 wrote: »

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?

Not true. Companies issue new shares as required and subject to limits approved at shareholder meetings (generally 10% extra without prior approval). There is generally nothing to stop all shareholders reinvesting their dividends and if they did, they would be in exactly the same position as before the dividend hence the dividend would be a pointless administrative exercise.

Much better to take the dividends as cash so you derive some benfit from your shares. Then reinvest that cash in other shares that are good value or the same share but at a price of your timing and choosing, not just any old 'reinvesting' price.

george4064

EdGasket wrote: »

Much better to take the dividends as cash so you derive some benfit from your shares. Then reinvest that cash in other shares that are good value or the same share but at a price of your timing and choosing, not just any old 'reinvesting' price.

I disagree, for a few reasons;

1. Dealing commission will far cheaper by automatically reinvesting.
2. What if the share price keeps rising? How will long will you wait for the share price to drop?
3. You are missing out on the vast benefits of compounding, this is often underestimated.

EdGasket

george4064 wrote: »

I disagree, for a few reasons;

1. Dealing commission will far cheaper by automatically reinvesting.
2. What if the share price keeps rising? How will long will you wait for the share price to drop?
3. You are missing out on the vast benefits of compounding, this is often underestimated.

On the contrary

1) dealing commission will be relatively more expensive on your small dividend e.g. 1% compared to a flat fee of £5.95 or £10 (whatever) on a £10K investment
2) You can pool your dividends, add other funds and buy something else that is good value
3) As I tried to explain you are not compounding anything because if all shareholders reinvest the dividend in new shares, you don't own any more of the company than you did prior to the reinvestment. Hence you are no better off.

george4064

EdGasket wrote: »

On the contrary

1) dealing commission will be relatively more expensive on your small dividend e.g. 1% compared to a flat fee of £5.95 or £10 (whatever) on a £10K investment
2) You can pool your dividends, add other funds and buy something else that is good value
3) As I tried to explain you are not compounding anything because if all shareholders reinvest the dividend in new shares, you don't own any more of the company than you did prior to the reinvestment. Hence you are no better off.

If point 3 was true the company would have to issue the exact number of new shares required for each shareholder to reinvest their dividend income.

Since with listed shares for every buyer there is a seller, so assuming the company does not issue the exact number of new shares for each shareholder to purchase more shares using their dividend cash then investors who do re-invest their dividends are better off.

EdGasket

george4064 wrote: »

If point 3 was true the company would have to issue the exact number of new shares required for each shareholder to reinvest their dividend income.

Since with listed shares for every buyer there is a seller, so assuming the company does not issue the exact number of new shares for each shareholder to purchase more shares using their dividend cash then investors who do re-invest their dividends are better off.

Companies have a 'float' of new but unissued shares available for company share schemes, director share options, and dividend reinvestment. They just issue however many are required. Buyers and sellers don't come into the equation.

george4064

EdGasket wrote: »

Companies have a 'float' of new but unissued shares available for company share schemes, director share options, and dividend reinvestment. They just issue however many are required. Buyers and sellers don't come into the equation.

But shareholders that hold shares with platforms such as HL, Charles Stanley etc who reinvest their dividends buy them from the secondary market and therefore not newly issued shares.

EdGasket

george4064 wrote: »

But shareholders that hold shares with platforms such as HL, Charles Stanley etc who reinvest their dividends buy them from the secondary market and therefore not newly issued shares.

Really?? I rather think it's down to the company itself.

http://moneyweek.com/cut-the-cost-of-reinvesting-dividends-2/

"A scrip dividend is a dividend that’s paid in shares that have been newly issued by the company, rather than in cash."

Also
"If a company has 100 million shares in issue and gives each shareholder another share for each one they hold, there are now 200 million shares in issue. Each is worth half as much as before, no cash has changed hands and nobody is any better off."

george4064

EdGasket wrote: »

Really?? I rather think it's down to the company itself.

http://moneyweek.com/cut-the-cost-of-reinvesting-dividends-2/

"A scrip dividend is a dividend that’s paid in shares that have been newly issued by the company, rather than in cash."

Also
"If a company has 100 million shares in issue and gives each shareholder another share for each one they hold, there are now 200 million shares in issue. Each is worth half as much as before, no cash has changed hands and nobody is any better off."

Yes, scrip dividends can only occur with shareholders who hold paper certificates or hold the shares directly with the company/registrar.

Majority of shareholders hold via platforms, and therefore reinvest dividends automatically where each platform bulks all the dividend money for a particular company and makes 1 large purchase from th secondary market (ie from a seller). The shares will then will be split out of the large purchase to each of the individual shareholders on their platform.

Edit: Also bear in mind that many companies hold shares in treasury, therefore if the company 'release' those shares it doesnt affect the total number of shares in issue therefore not diluting other shareholders when distributing those shares.

bowlhead99

EdGasket wrote: »

Not true. Companies issue new shares as required and subject to limits approved at shareholder meetings (generally 10% extra without prior approval). There is generally nothing to stop all shareholders reinvesting their dividends and if they did, they would be in exactly the same position as before the dividend hence the dividend would be a pointless administrative exercise.

Just because the directors have shareholder approval to raise money or allow in a strategic investor by diluting existing shareholders without applying preemption rights, it does not follow that if there is strong demand for shares they will automatically go create some more and issue them to everyone who wants more shares, suppressing the price. Especially not if they just distributed x% of the company's value because of the cash being surplus to requirements.

EdGasket wrote: »

Companies have a 'float' of new but unissued shares available for company share schemes, director share options, and dividend reinvestment. They just issue however many are required. Buyers and sellers don't come into the equation.

In the very specific case of a company-sponsored, share capital re-investment program with scrip dividends available, then yes, they are willing to pay you out your dividend as new shares instead of as cash and buyers and sellers don't come into it.

In such a case, if everyone took them up on it then yes it would just be a hassle-filled admin exercise -although it would at least demonstrate to the market that the company was generating decent free cash flow if they were willing to pay it out.

However, companies do not all offer such schemes (even if the board has the right to issue new shares) and where they do, it is generally expected that a large proportion of the free float investor base will not take them up on it. Many large institutions such as pension funds want to receive the income generated from their portfolio.

So, if a dividend is paid and I would like to spend my money buying more shares to maintain my £ exposure to that company, in many cases the company will not just issue shares to soak up my demand for shares. If they do not need the money (and usually they don't, which is why they were willing to pay a dividend) they will let me buy shares in the market, and have the shares rise in price as a result of the demand from me and others. Supply and demand totally comes into it.

george4064 wrote: »

I disagree, for a few reasons;
3. You are missing out on the vast benefits of compounding, this is often underestimated.

I think you may be missing the point by only focusing on part of Ed's sentence, though I don't think he made his point very well.

Whether someone reinvests their dividend cash in the company that paid them the dividend, or they reinvest it in a different company that has just as good or better prospects, it doesn't matter in terms of their ability to grow the portfolio. Like if I take my interest from an interest bearing Lloyds account and put it in an interest bearing nationwide account I an not "missing out on compounding".

Clearly if I keep the cash sitting around uninvested and not in a high interest account then I might miss out on compounding my gains, but equity investments do not offer straight line fixed interest returns. It may be better to reinvest in 'apparent good value company B' or wait for the price of 'apparently expensive company A' to moderate, instead of blindly reinvesting in 'apparently expensive company A'.

Reviewing your portfolio and available resources on a periodic basis rather than a blind automaton approach is part and parcel of investing in selected companies and funds rather than a general passive tracker.