Fund Costs vs Higher Dividend Reinvestment

stephend05 · 4 June 2015 at 7:33PM

I'm starting out with investing and looking to invest a regular monthly sum into the stock market and grow the amount for around 35 years. I have been researching into this topic for about a year and I am now at the point financially to be able to go ahead. Many sites recommend index funds, which I agree seem to outperform especially with their low costs taken into account so ideally I would like an index tracker portfolio of funds rather than active growth funds.

I have also read that reinvesting dividends provides one of the best ways to grow what you have over my time horizon and noticed that most index funds have a low dividend of 2% or less. Many active equity income funds have a higher dividend of 4% and while they do have higher costs, they aren't enough to make up that general difference in dividend offered (from the website summaries anyway).

To me it seems both sides have an advantage and many sources say dividend reinvesting is the crucial for growth and others say there are just too many hidden costs in active funds. I'm wondering which one comes out on top? None of the hundreds of articles I have read seem to take the difference in dividend reinvestment into account when comparing active and passive strategies over such a long time.

I would like to get the right from the start so any advice at all would be great even if I'm looking at all the wrong things to begin with.

Thanks for reading

Steve

(I did a quick search before posting this and couldn't see this specific aspect of active v passive covered although I would imagine it's buried somewhere. Apologies if so)

jimjames · 4 June 2015 at 9:26PM

Index trackers still pay dividends.

It's around 3-3.5% for the FTSE

4% dividend with 1% fees or 3.5% dividend with 0.1% fees, take your pick!

xylophone · 4 June 2015 at 9:54PM

Choose your platform.

http://www.thisismoney.co.uk/money/diyinvesting/article-1718291/Pick-best-cheapest-investment-Isa-platform.html

http://monevator.com/compare-uk-cheapest-online-brokers/

http://monevator.com/vanguard-lifestrategy/

http://www.thisismoney.co.uk/money/investing/article-1583915/A-guide-cheapest-index-tracker-funds.html

fairleads · 4 June 2015 at 10:42PM

JJ
Generally speaking, returns - dividend yields - are nett of fees so the comparison is irrelevant.

Aretnap · 4 June 2015 at 11:38PM

Income funds invest mainly in companies which pay good dividends. This approach can have advantages and disadvantages. Companies which pay high dividends are often large mature companies with limited potential for further growth. So the higher dividends may be offset by lower capital growth than you'd see in a fund which invests in companies which don't pay much of a dividend but which are (hopefully) still growing their sales, profits and share price. Depending on market conditions the overall performance of income funds can be better or worse than that of growth funds, or funds which adopt a balance of the two approaches.

If you want to invest in income funds you're not restricted to active funds. There are also passive income funds available - not a recommendation, but an example is the iShares UK Dividend ETF which tracks the performance of the 50 highest dividend yielding stocks in the FTSE350, and pays a dividend of 4.2%.

http://www.ishares.com/uk/individual/en/products/251807/ishares-uk-dividend-ucits-etf?siteEntryPassthrough=true

Linton · 5 June 2015 at 3:40PM

Aretnap wrote: »

.....

If you want to invest in income funds you're not restricted to active funds. There are also passive income funds available - not a recommendation, but an example is the iShares UK Dividend ETF which tracks the performance of the 50 highest dividend yielding stocks in the FTSE350, and pays a dividend of 4.2%.

http://www.ishares.com/uk/individual/en/products/251807/ishares-uk-dividend-ucits-etf?siteEntryPassthrough=true

Be aware of the risks of passive dividend funds. In particular look at what happened to IUKD during the Crash. It focuses blindly on high div payers, and of course prior to the crash the banks were high div payers. It fell (from memory) even on a total return basis around 50% far in excess of the wider indexes. Active managers can and do ensure that their funds are more broadly invested.

The Vanguard UK div fund uses a bespoke index which deliberately encourages a diversification of sectors but its yield is below 4%.

Thrugelmir · 5 June 2015 at 6:03PM

stephend05 wrote: »

I have also read that reinvesting dividends provides one of the best ways to grow what you have over my time horizon and noticed that most index funds have a low dividend of 2% or less.

Dividend reinvestment is a different topic to how high the dividend yield is.

Dividend reinvestment is how the majority of gain is made with equity investments over the longer term.

Companies paying a high yield do so for a reason. The dividend may be unsustainable or the Company has no viable use for the cash for example.

Companies paying a low yield may be growing rapidly. Therefore retain cash to grow the business while progressively raising the dividend.

Fund Costs vs Higher Dividend Reinvestment

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