HL Dividend Reinvestment in Funds

Audaxer

I read on the HL site that there is a charge if you select dividend reinvestment on funds, as well as shares and ITs. While I can see the benefits of a small charge for dividend reinvestment on shares and ITs which have higher trading costs, I don't see the point in paying for reinvesting dividends in funds, as presumably you could reinvest dividends manually for free, the same as you would do with any trading of funds.

Is that correct or is there any advantage for paying for dividend reinvestment in funds that I am missing?

m_c_s

HL Income instructions

"Automatically re-invested: we will reinvest any income automatically for you when it reaches £10 (or your chosen minimum) per holding. Automatic re-investments take place between the 11th and 21st of the month and are charged at 1%, minimum £1, maximum £10."

Alexland

I can't see why you would want to pay HL for fund reinvestment either. Unless you are likely to forget to login and reinvest. Given most popular funds are available with accumulation units this probably is not an issue for most HL fund investors.

Audaxer

m_c_s wrote: »

HL Income instructions

"Automatically re-invested: we will reinvest any income automatically for you when it reaches £10 (or your chosen minimum) per holding. Automatic re-investments take place between the 11th and 21st of the month and are charged at 1%, minimum £1, maximum £10."

That's what I mean. Why would you want to pay a charge when you can reinvest the money in a fund as a normal trade for free.

Audaxer

Alexland wrote: »

I can't see why you would want to pay HL for fund reinvestment either. Unless you are likely to forget to login and reinvest. Given most popular funds are available with accumulation units this probably is not an issue for most HL fund investors.

That's true, but I was considering investing in a couple more multi assets funds that pay monthly dividends. I like the idea of getting dividends and having the option to reinvest the dividends initially, but also having the option of taking the dividends as cash as and when I need to.

I think it's a psychological thing, but I also prefer 'Inc' funds with dividends continuing being received during an equity crash when capital values will fall.

bostonerimus

They get you at every turn. With Vanguard in the US I can choose to reinvest dividends or have them swept into a money market account (basically cash) at no charge.

Alexland

Audaxer wrote: »

That's true, but I was considering investing in a couple more multi assets funds that pay monthly dividends. I like the idea of getting dividends and having the option to reinvest the dividends initially, but also having the option of taking the dividends as cash as and when I need to.

I think it's a psychological thing, but I also prefer 'Inc' funds with dividends continuing being received during an equity crash when capital values will fall.

Yes entirely psychological. If you are taking income it just means the investments will take longer to recover as the dividends within an accumulation fund would be buying back in at a lower level.

bowlhead99

Audaxer wrote: »

I think it's a psychological thing, but I also prefer 'Inc' funds with dividends continuing being received during an equity crash when capital values will fall.

When capital values are falling it might be a nice time to reinvest the dividends you are receiving from the underlying investments, at nice low prices.

Basically you are saying you would prefer to have an 'inc' fund in which you have to watch the net asset value come dowm more sharply (because the underlying assets fell in value and it also paid out some of its cash resources to its investors) and then perhaps reinvest some money in that low valued fund... instead of having an 'acc' fund which accumulated the dividends from the underlying investee companies and reinvested them rather than paying out, so that its NAV fell more modestly, and you didn't need to reinvest anything because it had already been done.

As you suggest, it's all psychological because you get to the same place in the end. For investing it probably just makes sense to go with the method that works best for you, psychologically, in preventing you getting freaked out at the value changes and doing something detrimental to your portfolio. If that means having to wait for cash dividends to arrive before you can put them to work again, because seeing them arrive is a nice comfort blanket when markets are volatile, then so be it.

Personally where I have a large number of holdings and adding new money myself monthly (e.g. my pension) it's relatively efficient to just have them all set to Inc and then I have money on hand to help the ongoing investing and rebalancing process. But if I was running a one or two or three fund portfolio and not adding new money, it would be annoying to receive little scraps of cash from time to time and have them sitting idle, so I would just use Acc funds and deal with rebalancing once a year or whenever I got around to it.

bostonerimus wrote: »

With Vanguard in the US I can choose to reinvest dividends or have them swept into a money market account (basically cash) at no charge.

In the UK and Europe, Vanguard and the other fund providers deliberately create one class of share which is an accumulation version which reinvests the dividends at no charge and an income/distributing version as a different class of share which pays them out into cash at no charge.

However, Audaxer thinks, OK, I appreciate I could just use the accumulation version for the next couple of years as I don't need the dividends, but I am not going to tell Vanguard that's my position, I like the idea of being given a stream of cash and then sometimes I will go spend it and othertimes I will want to reinvest it. So please Vanguard send my broker those dividends as cash every time, and then once you have dealt with it and think the distribution event is concluded, I'll pipe up and say "hey thanks for the cash but actually I don't want the cash now, I'd like to reinvest it and buy new units with this thirteen pounds ninety eight pence you just sent me, I know the minimum order size is usually £50 or £100 per month on a regular programme or £500 for ad-hoc investments, but I just want to put this £13.98 to work right now, so please stick it back into the fund and allocate 0.015 new units for me at today's price".

Someone like Audaxer wanting to receive cash income from the investment just so he can get the psychological comfort blanket of seeing that his investment is generating something for him, and then wanting to put that money right back into the investment as a separate manual process for his broker - when he could have just used accumulating units in the first place - is just creating work for the broker.

It's not surprising that the broker has said if you are going to use a product that generates cash and you are wanting to give a standing instruction for me to reinvest monies arriving from the investment as a separate controlled process, when for 90% of the funds we offer you could have just used the accumulating class where the fund manager doesn't do a distribution and doesn't have to handle a new subscription and I don't have to process the receipt of the cash and then immediately reinvest your cash... I'm going to charge you for that service. And I'm going to charge you not less than a quid, and that quid might be quite material in the context of your £13.98 income for the month but that's your fault for choosing an inherently inefficient process just because you 'like to see the cash' as a psychological thing rather than a logical efficient thing.

They get you at every turn

Yes, they do aim to charge you when you want to create work for them. That way, the costs of operating their business are funded by the customers who create the work, rather than by the whole customer base.

Audaxer

bowlhead99 wrote: »

When capital values are falling it might be a nice time to reinvest the dividends you are receiving from the underlying investments, at nice low prices.

Yes, that was part of my thinking. Also thinking if I have say 1,000 units in Fund A Inc valued at £10,000 and received annual dividends of £400, if I reinvested the £400 it would buy more units on which to pay future dividends. When I took the dividends eventually they would be paying out at so much per unit on more than 1,000 units. If on the other hand I had £10,000 invested in Fund A Acc, although the value of the fund would be increasing at the same rate as the Inc version with dividends reinvested the number of units would not be increasing, so when I did go to take income from the fund I would have to make a conscious decision to sell part of the capital. If the market had fallen and you needed to take the income at the time, it would be in my view a more difficult decision to sell some capital at a loss rather than just take the dividend on the Inc version.

If I initially had the Acc version of the fund and wanted to change in time to the Inc version, presumably I couldn't just swap versions. I think I would have to sell the Acc version and buy the Inc version when the proceeds arrive, so be out of the market maybe for a few days?

Personally where I have a large number of holdings and adding new money myself monthly (e.g. my pension) it's relatively efficient to just have them all set to Inc and then I have money on hand to help the ongoing investing and rebalancing process.

That is what I am currently doing with my Income portfolio with AJ Bell. I have 12 funds, one with monthly dividends but most with quarterly dividends. I am letting the dividends build up and will probably reinvest them after 6 months when amounts are significant as it costs £1.50 for each purchase - not a lot, but it would mount up if reinvesting every time a dividend is received.

OldMusicGuy

I am on HL only have one Inc fund, my first, everything else is Acc. My plan is to use this as a potential income stream to augment SP when I reach that age (the other funds are more long term growth investments). So I set it to Inc. I realise now it's probably easier just to use Acc and sell funds when I need the cash, but with the Inc fund I use cash to buy units as soon as the dividend is announced. Unlike Audaxer this wasn't part of my thinking but I've realised it's a good move because the NAV falls after dividend announcement. When the actual dividend is paid that just sits in my cash account.

AFAIK if you want to switch from Inc to Acc or vice versa, you will have to sell and rebuy so like you say you will be out of the market for a little while.

le_loup

OldMusicGuy wrote: »

AFAIK if you want to switch from Inc to Acc or vice versa, you will have to sell and rebuy so like you say you will be out of the market for a little while.

With H-L, just one day.