Boosting investments with a simple saving strategy

Simply reinvesting dividends is a strategy that can turbocharge investments and lead to some spectacular results suggests an analysis by financial experts.

Number crunching share portfolios based on the FTSE All Share Index shows that over 10 years, share values would be around 20% higher if dividends were reinvested.

Fund managers Fidelity International looked at investments over 10, 20 and 30 years to compare how taking dividends as income instead of leaving them in the portfolio would affect their value.

The analysis was based on saving £100 a month over the investment term.

In each case, reinvesting dividends would see an investor with more cash in the bank than if they had taken the money as income.

How turbocharged saving works

Fidelity International investment director Tom Stevenson said: “Reinvesting your dividends is one of those age-old investment strategies you can adopt to boost your wealth, especially when coupled with the phenomenon of compounding.

“The critical component here is time. It is the key factor of compounding and the reason why you should start to save as soon as you can. By investing regularly and reinvesting income over the long term, our figures show that this approach can help you double your returns.”

Fidelity International worked out the figures for savers putting £100 into investments over 10, 20 and 30 years and here are the results:

Investment comparison table

Source: Fidelity International

Note: The table figures are based on investing £100 a month in the FTSE All Share between April 30, 2006 and March 31, 2016.

The table shows that the longer money is invested and dividends are used to boost the fund, the more savings grow.

Stevenson explained that the true power of compounding is apparent over 30 years, but still spectacular over shorter terms.

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Making your money work harder

Over 30 years, the strategy can make a £66,645 difference that doubles a fund – and stashing the £100 a month in the bank only builds a £49,404 nest egg.

But each term reveals a much larger return than leaving money in the bank or spending the income generated by investments.

“In the current lower-for-longer interest rate environment, investing in income-paying shares continues to be a very attractive option,” said Stevenson.

“Selectivity remains key, however, not least because dividends have been under pressure of late. It pays, therefore, to put your money with an experienced fund manager who has been through a few market cycles and is able to identify companies that pay not just high but also sustainable income.”

The reinvestment strategy does not only work with investment funds, but pensions, ISAs and other investments that give regular returns.

Another tip is to make sure any savings go into accumulation rather than income funds to take full advantage of the strategy.

Do you have any simple saving strategies? Please share them with us in the comments below!