Monday, 5 October 2015

Dividend reinvestment example investment

A similar example but this time assuming all dividends are invested again rather than taken as income. Assume in 2011 you invested £10,000 in this investment trust. The price then was £6.60 per share so you'd have got 1515 shares you now own.

In 2011 you'd have received 28.75p income per share as dividends, that's a total of £435.56 and equivalent to 4.3% on your £10,000 but rather than taking that income you reinvest it to buy more shares. At £6.60 each that's another 66 shares you can add to your holding bringing the total to 1581.

In 2012 the share price had dropped to 640p so your £10,000 would now have been worth £10118, an increase on your original investment as it now includes reinvested dividends. However if you'd held your nerve and not sold out you'd have received your annual dividends, this year of 29.75p per share now based on the 1581 shares, a total of £470.34 so now 4.7% of your original £10,000. Again you reinvest this and buy another 73 shares with the dividends so your total now is 1654 shares.

In 2013 the share price had grown, this time to 741p so your 1654 shares would be worth £12,256. Yet again the dividends increased, this time to 30.75p per share and with your new total of 1654 shares you get income of £508.60. Once more you reinvest and add another 68 shares to your holding so you have 1722 shares.

Come 2014 and the share price had increased again to 779p making your 1722 shares now worth £13,414 and you receive dividends of 31.25p on them, now giving £538.12 income. Once you reinvest the dividends you get another 69 shares to add, making a total of 1791.

Finally this year your dividends have increased to 32p giving a total income of £573.12 which is 5.7% of your original £10k. The share price has dropped back a bit so it's now 705p meaning your investment of 1791 shares is worth £12,626.

In total over 5 years by reinvesting rather than taking the income out you've ended with an investment worth £12,626 compared to £10,000 originally and are now receiving an income of 5.7% of your original £10,000 investment and have an additional 276 shares now producing an income. This is an example of the great benefit of compounding returns.

Bear in mind this isn't speculation or "what-if" scenarios. These are real numbers showing how one real investment has performed over the last 5 years, a time period with volatility and that some have said the markets are too high to invest in. Even if markets drop now they'd need to fall 26% to take you below your original investment and you'd still be receiving dividends equivalent to 5.7% of your initial investment.

[few assumptions made, some rounding in numbers and that shares are reinvested once at the same price point each year]

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