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Dividends. Boring, but brilliant — 7IM Short Thoughts

1 min watch

Ben Kumar, Head of Equity Strategy14 Feb 2024

All-time highs in markets are part of the way investing works and you need those to generate portfolio returns – we tried to convince you of this last week in our last Short Thoughts video.

But a potentially more boring way to generate portfolio returns is by reinvesting dividends. This can be the most interesting thing you can do – giving you the opportunity to increase your returns significantly.

Ben reveals how this works in practice with two familiar indexes.

Transcript

Last week, I tried to convince you that all-time highs in markets aren't really worth getting worked up about. That is just part of the way investing works. You need the all-time highs to generate your portfolio returns. Another, maybe even more boring, way that portfolio returns are generated is reinvesting dividends. And I've talked about this before, but I can use last week's chart to make the point even further.

When you look at the Japanese market over the last 35 years since it last made an all-time high, it's returned minus 13%. If you've diligently reinvested your dividends in Japan, you can pull it up to about a 47% return over time. The average dividend in Japan has been about 1%. But with the FTSE 100, where the average dividend has been about 4% over the last 35 years, you see the 224% price return in the pale blue turn into a 1,045% return once you've reinvested the dividends.

So, instead of tripling your money, you've ended up multiplying it by 10. That is why reinvesting your dividends, although it's boring, is actually the most interesting thing you can do.