Automatic Dividend re-investment

homerhotspur

I have just opened an ISA and bought some individual shares for the first time. What is the view on automatic dividend re-investment please;

The charges are capped at £5.

What is the recommended approach to take?

lonewolf123

The general view is that if you can afford to reinvest dividends i.e. you don't need it for some time to come then definitely reinvest it.

Literally tons of data out there on the power of reinvesting dividends.

masonic

I wouldn't use automatic reinvestment when there is a charge. I just leave the cash on account and invest it when I subscribe new money (which I do quite regularly).

homerhotspur

Yes , I am more than happy to re-invest dividends but, unlike acc funds, there are these charges to consider which, I reckon, could add up to quite a bit especially if dividends are more regular than annual.

bowlhead99

Say you have £2000 invested and the company yields about 3% a year. Perhaps it will pays out 1% for its half year dividend and 2% for the final dividend each year. That's £60 arriving in your account but you'll get the payments six months apart as a £20 chunk and a £40 chunk.

If you get the £20 and don't bother to reinvest that for an entire year, and it just sits idle and dormant in your account for a whole year because you are not putting any more money in the ISA and doing any more investing until 2018 - you would miss out on a year's worth of dividends (3% a year on £20 is 60p) and maybe some capital growth (say 4% a year on £20 is 80p). So you've missed that 7% total return, of £1.40 for that year. But in the plus side, you have saved a dividend reinvestment charge.

If the dividend reinvestment charge was £1.50, there's no point bothering. You might as well wait until you are doing some more trading next year and roll it into one of those transactions and spend it then. Whereas, if it was 1% with no minimum (good luck finding that deal) then it's only 20p so is probably a no brainer to sign up for as a lazy option. It means you kept 99% of your dividends and only blew 1% reinvesting them.

Somewhere in between, like 5% (£1 on £20 of divs) is still a huge waste of money as you don't get rich in the stock market by throwing away 5% of everything you have to invest.

There is also the practical point that if you received £20 of dividends from a company with a £40 share price, it wouldn't be enough to buy one share so the feature is useless to you. And if the company had a £10 share price then you can only afford one share (because of needing to pay the fee and stamp duty) and the other (nearly)10 is unspent. So you would be paying a fee of £1 minimum or whatever, but only getting £10 of shares, which is a 10% fee - much better avoided.

If you are a much bigger investor and each of your holdings is £20k+, you might be getting dividends of a few hundred quid a time, and paying a small fee capped at a fiver is probably ok for an easy life. But it is still often cheaper to save up the cash arriving from dividends and lump them together with other dividends and new money from time to time, to make more meaningful purchases - unless the dividend reinvesting program is super cheap.

Edit -seeing your last post:

You probably want a bit of cash in your account anyway, to pay platform fees or other quarterly/annual charges from the broker for account maintenance. So no harm in saying "pass" on div reinvestment plans. If you can buy funds without transaction fees, you could always just buy more of those accumulating funds with your divs received from the shares.

talexuser

It is a question of scale. If your dividends total 4k a year and buying costs 2% capped at £5 so at the end of the year the reinvestment fees were around £75 out of 4k you are better off being in the market as soon as possible rather than waiting? Stamp duty would work out the same either way.

atush

masonic wrote: »

I wouldn't use automatic reinvestment when there is a charge. I just leave the cash on account and invest it when I subscribe new money (which I do quite regularly).

Me too. i let the divs roll on up until I have money to invest (in the same or a different share- usually different).

moneyfoolish

I don't understand why anybody who wanted to re-invest all dividends would not buy an acc fund with no dividend charges. Can anybody enlighten me?

System

The OP is asking about individual shares not funds!

moneyfoolish

Economic wrote: »

The OP is asking about individual shares not funds!

Note to self: Please read more carefully!!!!!

cloud_dog

Whilst I agree with the caveats posted regarding dividend re-investment, there is one aspect which you have conveniently not mentioned...the psychology of investing.

With auto-dividend reinvestment, this troublesome element is removed.

You need to be very organised and self aware to continue or to make a investment when you have a 'pot' of money to invest. If the share price is reasonably high you are likely (????) to defer making the re-investment (of the dividends). And, whilst you may be lucky and this turns out to be a positive thing, it is also likely to mean you do not re-invest, do not benefit from further SP increases, do not obtain more dividend.

Obviously, different situations can direct a different course of action, i.e. you don't want a larger holding in the stock generating the income or you are very regimented in your approach and will on the 4th April every year re-invest all the dividends for the year but....