Dividend reinvestment

Hi all,

A little help needed for a rookie.

Can anyone explain to me the advantages and disadvantages of mutual funds that offer dividend reinvestment, and also how these compare with regular growth mutual funds?

Thanks in advance!

Comments

  • dunstonh
    dunstonh Posts: 116,038
    Name Dropper First Anniversary Combo Breaker First Post
    Forumite
    Can anyone explain to me the advantages and disadvantages of mutual funds that offer dividend reinvestment, and also how these compare with regular growth mutual funds?

    If you reinvest the dividends then they are identical in returns.

    Only difference is acc units retain the income within the value of the fund and unit price reflects the value. inc unit price do not reflect the income as it is no longer in the fund. But if you reinvest to buy more units, you end up with the same result. In simple terms its like 3x4 or 4x3.

    I prefer income units as they are cleaner. Plus, when not using a tax wrapper, it makes the CGT calculation much easier.

    "mutual fund" is a bit of an Amercanism that is not used much in the UK. Some tried to get it to become popular here but it didnt. So, when you say regular growth mutual fund are you referring to Unit Trusts, OEICs, SICAVs, ICVC, pension funds, life funds, investment trusts, ETFs etc? (mutual funds could cover many of those). I would recommend you stop using the phrase mutual funds.
    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • dunstonh wrote: »
    "mutual fund" is a bit of an Amercanism that is not used much in the UK. Some tried to get it to become popular here but it didnt. So, when you say regular growth mutual fund are you referring to Unit Trusts, OEICs, SICAVs, ICVC, pension funds, life funds, investment trusts, ETFs etc? (mutual funds could cover many of those). I would recommend you stop using the phrase mutual funds.

    Sorry, I'm not clued up on what half those things are. So for the sake of simplicity, I'm talking about 100% equity investment funds such as the index funds offered by Vanguard. What is the correct terminology for that?
  • dunstonh
    dunstonh Posts: 116,038
    Name Dropper First Anniversary Combo Breaker First Post
    Forumite
    So for the sake of simplicity, I'm talking about 100% equity investment funds such as the index funds offered by Vanguard. What is the correct terminology for that?

    Vanguard issue OEICs and ETFs. The OEICs get FSCS cover. The ETFs do not.

    They do much the same thing but in a different legal framework and have different things to be aware of. ETFs are broadly one level higher on the risk scale than the comparative OEIC. ETFs are not normally considered for inexperienced investors given the increased level of knowledge and understanding required and the lack of FSCS cover.
    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • AnotherJoe
    AnotherJoe Posts: 19,622
    First Anniversary Name Dropper First Post Photogenic
    Forumite
    dunstonh wrote: »
    If you reinvest the dividends then they are identical in returns..

    Tut tut Dunston you should know that's not true, either in theory (where to be fair the difference would likely be marginal) and more to the point, in practice where the difference could be meaningful. Acc will on average have a better return simply because you have your money fully invested at all times. And if you have ETFs or similar you avoid transaction costs.
    dunstonh wrote: »
    Plus, when not using a tax wrapper, it makes the CGT calculation much easier.
    .

    But since most people do use a tax wrapper (ISA or SIPP) that doesn't matter, and it's one more thing to deal with and makes things messier to see what's growth been between different investments. So not cleaner at all. Much messier in fact.
  • dunstonh
    dunstonh Posts: 116,038
    Name Dropper First Anniversary Combo Breaker First Post
    Forumite
    Tut tut Dunston you should know that's not true, either in theory (where to be fair the difference would likely be marginal) and more to the point, in practice where the difference could be meaningful. Acc will on average have a better return simply because you have your money fully invested at all times. And if you have ETFs or similar you avoid transaction costs.

    At the point answered, it looked like UT/OEICs. reinvestment of dividends gives the same return. there is is the potential for a delay on repurchase which could see unit price rise or fall a tad but it is insignificant and could work either way.

    Since 2011, VLS 60 acc = 75.63% inc = 75.56% As good as no difference.
    But since most people do use a tax wrapper (ISA or SIPP) that doesn't matter, and it's one more thing to deal with and makes things messier to see what's growth been between different investments. So not cleaner at all. Much messier in fact.

    Small investors would mostly use a tax wrapper but I find most investors have unwrapped holdings. Remember that the ISA allowance is just £20,000. It doesn't take much to require unwrapped accounts. The OP has not mentioned any amounts. So, we don't know what wrappers are involved or whether unwrapped will be.
    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • AnotherJoe
    AnotherJoe Posts: 19,622
    First Anniversary Name Dropper First Post Photogenic
    Forumite
    dunstonh wrote: »
    At the point answered, it looked like UT/OEICs. reinvestment of dividends gives the same return. there is is the potential for a delay on repurchase which could see unit price rise or fall a tad but it is insignificant and could work either way.

    Since 2011, VLS 60 acc = 75.63% inc = 75.56% As good as no difference.
    .

    Are those theoretical figures For inc reinvested ? Eg assuming it goes in the day it's received with no transaction costs ? In reality and in the long term with dividends trickling in and people waiting until they have an appreciable amount plus transaction costs plus long term time out of the market, inc will be lower
    dunstonh wrote: »
    Small investors would mostly use a tax wrapper but I find most investors have unwrapped holdings. Remember that the ISA allowance is just £20,000. It doesn't take much to require unwrapped accounts. The OP has not mentioned any amounts. So, we don't know what wrappers are involved or whether unwrapped will be.

    Fair point but still leads to intermingling of dividends unless you are very disciplined making it more difficult to work out how well or badly investments are doing . I thought my Marstons investment was doing really badly but after looking at the dividends I see it's only badly :D
  • dunstonh
    dunstonh Posts: 116,038
    Name Dropper First Anniversary Combo Breaker First Post
    Forumite
    Are those theoretical figures For inc reinvested ?

    No. Actual. FE Analytics total return.

    Fair point but still leads to intermingling of dividends unless you are very disciplined making it more difficult to work out how well or badly investments are doing . I thought my Marstons investment was doing really badly but after looking at the dividends I see it's only badly

    I suspect it all comes down to knowledge and understanding.

    However, remember the thread over the last week or two where someone with acc units couldn't work out the dividends and equalisation deductions etc. They wouldn't have had those complications with inc units ;)
    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • Audaxer
    Audaxer Posts: 3,506
    First Anniversary Name Dropper First Post
    Forumite
    AnotherJoe wrote: »
    Are those theoretical figures For inc reinvested ? Eg assuming it goes in the day it's received with no transaction costs ? In reality and in the long term with dividends trickling in and people waiting until they have an appreciable amount plus transaction costs plus long term time out of the market, inc will be lower
    I think it could work either way, as if you were reinvesting a few months worth of dividends now, you would benefit from lower prices. Being retired with an income portfolio I like to see the dividends coming in, even although I'm reinvesting them at present. When it comes to taking income I'd be more comfortable taking dividend income in a market crash, than selling units in an Acc fund.
  • dunstonh wrote: »
    However, remember the thread over the last week or two where someone with acc units couldn't work out the dividends and equalisation deductions etc. They wouldn't have had those complications with inc units ;)

    Now, that thread did start a few months ago with someone asking about the difference between dividends and equalisation on acc units.

    However its most recent resurrection came from a poster who used income units and had evolved a very labour-intensive way of calculating the effect of equalisation on CGT.

    So perhaps we should call that thread a draw :)

    If you use acc units, then you can ignore the equalisation. But then the reasoning process that gets you there is a little non-intuitive: I've questioned myself on it a couple of times and had to think it through.

    I reckon there's an argument for considering Inc simpler than Acc, and also an argument for the opposite - it seems to depend a bit on how your mind works and which you think is more natural.
This discussion has been closed.
Meet your Ambassadors

Categories

  • All Categories
  • 342.5K Banking & Borrowing
  • 249.9K Reduce Debt & Boost Income
  • 449.4K Spending & Discounts
  • 234.6K Work, Benefits & Business
  • 607.1K Mortgages, Homes & Bills
  • 172.8K Life & Family
  • 247.4K Travel & Transport
  • 1.5M Hobbies & Leisure
  • 15.8K Discuss & Feedback
  • 15.1K Coronavirus Support Boards