Say aloe to my little friend…dividends

I have never had a particularly green thumb. In fact, when my husband and I first moved in together I killed so many plants that he bought me artificial ones instead to ‘save them the misery.’

I had all but given up on making our home an urban jungle – that is until I purchased our aloe vera plant. Not only have I managed to keep him alive (yes, it has a gender – his name is Alan the Aloe) but this past weekend – upon giving Alan a new and bigger home – I discovered he’d had babies!

After some googling, I realised this is fairly common. In the proper conditions, cared-for aloe vera plants will start having ‘pups’ or offsets, which can be divided and propagated to make new aloe plants.

I invested £3 in Alan and he rewarded me with five new plants and will – fingers crossed – continue to reward me with a number of babies every year. And, as his children grow, they too will have babies and soon I’ll be giving away aloe plants to everyone I meet! Some might say my investment in Alan is paying dividends…

‘To plant a garden is to believe in tomorrow.’ – Audrey Hepburn

What is a dividend?

When a company makes a profit it has a choice as to what it does with that profit. It can reinvest in the business, give its employees a bonus or it can pay the money to its shareholders. When a company pays this money to its shareholders (usually as a cash payment), it is referred to as a dividend. Funds can also pay a dividend. This happens when the companies in which a fund invests pay dividends, and the fund passes on these payments to its investors.

The power of reinvesting

When dividends are paid you can of course take that payment and spend it, or you can choose to reinvest it. Reinvesting any dividends or interest you receive from your investments will boost your pot of money and earn more interest in the future – hello, compound interest.

Let’s look at an example. The table below shows the performance breakdown for six major stock markets over the past 15 years*. The difference between the price returned and the total returns (when dividends have been reinvested) is clear.

Price Returns*Total Returns (dividends reinvested)*
MSCI AC Asia ex Japan301.88%475.51%
MSCI China425.89%665.48%
MSCI Europe114.30%231.90%
MSCI Japan112.16%174.47%
MSCI United Kingdom65.26%195.10%
MSCI USA316.98%417.37%

The UK has a strong tradition of dividend paying companies, and UK equity income funds that target such companies and pass on the income to investors, have always been very popular.

But as you can see from the table above, dividends – and the benefits of compound interest – can be found all over the globe.

Indeed, in the first seven months of 2019**, the most popular sector for FundCalibre visitors was Global Equity Income, followed closely by UK Equity Income. The two sectors combined attracted 33% of all fund note views.

The top five most-viewed funds in those sectors over that time period** were Evenlode Global Income, Artemis Global Income, Artemis Income, Fidelity Global Dividend and Threadneedle UK Equity Income. The Evenlode fund had four times as many views as the average fund on the site.

Dividends are obviously popular. And no wonder: dividend payments are significant not only for those looking to receive a regular income from their investments, but also for those investors wanting to reinvest their income to enjoy the compound returns it will bring in the future.

Just as I suddenly went from having just one aloe to having six, your investments too can grow over time if reinvested. Our bookcase, filled with any number of little aloe plants, is proof that with a little attention and patience something little can grow into something much bigger. Now, what to name all my new baby aloe’s…

 

*Source: FE Analytics, total and price returns in sterling; 30 July 2004 to 30 July 2019
**Source: FundCalibre, 1 January 2019 to 30 July 2019

The views of the author and any people interviewed are their own and do not constitute financial advice. However the knowledge that professional analysts have analysed a fund or trust in depth before assigning them a rating can be a valuable additional filter for anyone looking to make their own decisions. Before you make any investment decision make sure you’re comfortable and fully understand the risks. If you invest in fund or trust make sure you know what specific risks they’re exposed to. Past performance is not a reliable guide to future returns. Remember all investments can fall in value as well as rise, so you could make a loss.