Hello, I'm Clare and welcome to Smart Investor, the show that can help you get the most from your investments. Please be aware that although we can't offer personal advice we're hoping each episode will provide you with the insight you need to make you a smarter investor. Today, we're looking at dividends and the impact they have on your investment returns.
When a company makes a profit it will often either reinvest it to grow the business further or pass some of it on to its share-holders in the form of a dividend. Companies that pay regular dividends are popular with investors seeking to use their investments to provide them with an income. However, even if you are investing for long-term growth dividends can have a significant impact on your overall return. Once you've received your dividends you can either keep the payments as income or reinvest them and buy more shares. Reinvesting your dividends can potentially make a big difference to the value of your investment portfolio over the long term.
Just look at this graph demonstrating the return of the MSCI UK index with the dark grey line showing "price return" or when dividends were taken as income versus the blue line, which shows the "net total return" or where dividends were reinvested. The reason for this is that when you reinvest dividends you benefit from compound investing. By reinvesting your dividends back into the market you accumulate more shares, which then also pay dividends. In turn, this means you'll have more dividends to reinvest in the future. And it doesn't matter whether you invest in shares directly or via funds. You can still reinvest any dividends you receive. If you invest using funds, you need to choose the accumulation version of the fund. If you opt for the income version, also sometimes called distribution any dividends will be paid out to you rather than being reinvested.
However, it's important to remember that reinvesting dividends doesn't necessarily guarantee you a strong investment return as the value of your investment can still fall as well as rise and past performance isn't a reliable indicator of future performance. It's also worth noting that just because a company has historically paid out dividends it doesn't necessarily mean it will continue to do so in the future. You can find out more on our website. Thanks for joining us and I hope you'll join us again soon on Smart Investor.