Investing & Compounding - for us regulars

Prism

J.Pricey wrote: »

So really what I'm looking for is share splits and dividends (not interest as such?)....

I wouldn't worry about share splits as they add no value. The are simply a mechanical way of lowering the price of each share while maintaining the value a shareholder owns. What yuu are usually after is a blend of a share price growing over time typically due to increasing company returns and possibly a dividend too. You can have one without the other. For example, Amazon does not pay a dividend but its share price has increased with its growth. BT has a great dividend but its share price has decreased in recent years. Neither share price growth or dividend is guaranteed but dividend is more reliable than hoping for a share price growth. Saying that, companies do sometimes cut or reduce their dividends. Growth tends to be more valuable than dividends too.

firestone

J.Pricey wrote: »

Big thank you to everyone that has posted thus far, I'm learning alot already. In particular a big thank you to AnotherJoe - you spotted a huge gap in my knowledge and helped fill it with a simple, clear and concise explanation. It's a little frustrating that I've not stumbled across this obvious and simple concept before now.

So really what I'm looking for is share splits and dividends (not interest as such?)....

So where do people go to actually purchase shares that pay dividends?

From what I can tell the likes of Etoro, plus500 etc, won't be suitable. I'd like to buy them myself rather than paying someone else to, if at all possible (tell me if it's not worth the hassle).

Also, are dividends variable, fixed, dependent on what the company offers? How can I find this information? (thanks to Firestone for giving me a head start on this one).

Think you may want to research a bit more and as others have said growth and income are important some may even say your age as by a rule of thumb older people are the ones looking for income.

But as to a couple of your questions you can buy them yourself from fund platforms/stockbrokers there are threads on here if you search about the cheapest depending on what you are trading & how often etc
Would not get hung up worrying about splits and yes div's are variable but it could be worth searching the term dividend hero's which would bring up articles on funds/shares with a strong track record

ColdIron

bcfclee27 wrote: »

Quick question on this - I get the Coca Cola example but does the same or similar happen if you invested in something like VLS or Fundsmith for example ?

There isn't the same motivation for splitting units as you can buy fractions of a unit so there isn't the same barrier to entry that exists for indivisible shares

Shashy

It might be worth going right back to the basics on the difference between savings and investments.

If you make a cash deposit in a 'savings' account, your money will often earn a fixed rate of interest for a fixed term, and the returns will compound at the appropriate rate. For example, if you invest £100 for 3 years at 2%; after year 1 your money will be worth £102, and the next period's 2% interest will apply to the £102 - that is compounding.

The returns mechanism on 'investments' like equities is slightly different, in that you need to account for capital growth, share splitting and potential dividend reinvestment. So if you bought 1 share of ABC plc for £100 and over the next year it grew by 5% and paid a £1 per share dividend (which you reinvested), you would have £105 + £1 for a value of £106. If this share then grew again in the subsequent years, the growth would apply to both the new capital value including the reinvested dividends, compounding your returns.

When assessing share prices over time, you need to look for the total returns figure including dividend payout, and normalising for share splits.

Let me know if that was any help.

AnotherJoe

Shashy wrote: »

When assessing share prices over time, you need to look for the total returns figure including dividend payout, and normalising for share splits.

Let me know if that was any help.

And just to emphasise for OPs benefit that pretty much all graphs you'll see of a shares price are already normalised for share splits. (Dont think ive ever seen one that didnt)

So for example if you look at Apple over the last few years you'll see a price of about $180 now declining as you go back in time. If you go back 4 years you'll see its showing at about $90.

However at that time the actual price of one Apple share was in the region of $700. But today, for every one you had then, you have seven.

So dont do something like looking at an IPO price and then assuming you can directly translate it to todays price. As I said the graphs normally (always?) build this in otherwise they would be nonsensical.

MallyGirl

One thing to consider with dividends is that there will be a cost associated with reinvesting that payout into more shares.

You probably ought not go too far with the individual share picking idea. Funds or ITs which include a number of shares is better for most. Then you often have the choice of Inc or Acc versions - the inc pays out dividends in cash to you but you have to deal with them, the Acc automatically reinvests any div payouts so the price grows.

atush

Mrabs wrote: »

The point you are trying to get to is dividend reinvestment better known as DRIP .
Each year hopefully company A pays a dividend which you reinvest to buy more shares which obviously increases your share holding .
The next year's dividend is then based on year 1 shares plus those bought through DRIP .
Then year 2 dividend is used to buy more shares which in turn increases your share holding which in turn increases the dividend earned and so it rolls on. Hence dividend paid increases whilst shareholding increases.
Hopefully I have explained it right ..

This


Reinvestment of dividends is what you were missing and is the true magic of compounding returns.

so say a 4% dividend. So year 1, 100 shares year 2 104 shares etc etc

atush

MallyGirl wrote: »

One thing to consider with dividends is that there will be a cost associated with reinvesting that payout into more shares.

You probably ought not go too far with the individual share picking idea. Funds or ITs which include a number of shares is better for most. Then you often have the choice of Inc or Acc versions - the inc pays out dividends in cash to you but you have to deal with them, the Acc automatically reinvests any div payouts so the price grows.

These costs (in my experience) are very low indeed. So choose your platform with this in mind

J.Pricey

Excellent, thanks everybody. So just a few final points before I leave you in peace;

Am I right in saying that share growth plays no real part in compounding? So whilst it's great to have that growth, the real aim is to get dividends to buy more shares. I suppose the key is that growth equals more dividends to subsequently reinvest?

If share prices go down that can ultimately wipe out any gains made from compounding?

I.e. 100 shares for £1 each with 5% growth and 5% dividend = £110.25 For year 1. Then the same again = £121.56 For year 2. But if the shares suddenly drop by say 30% I've lost money but also lost the benefit of compounding right? In a major of speaking back to square 1 or worse.

Can you earn dividends investing in indices?

Finally, and most importantly, who can recommend some platforms I should look into for investing my money?

Thanks again, I really appreciate everyone taking the time to respond and offer support.

lpgm

ColdIron wrote: »

There isn't the same motivation for splitting units as you can buy fractions of a unit so there isn't the same barrier to entry that exists for indivisible shares

Those funds are open-ended investment companies. They don't have units. They have shares that you can issue fractions of.