The value of reinvesting dividends
First impressions can be deceiving. Looking at the table below, investors could be disappointed at the performance of the UK stock market in recent history – particularly over three and ten years.
How the UK stock market has performed*
| Over one year | +7.27%* |
| Over three years | +13.30%* |
| Over five years | +33.65%* |
| Over ten years | +28.14%* |
For all the talk of a bull market since the market bottomed in 2009, returns don't look that impressive.
However, if you had reinvested the dividends paid by UK companies over the same time periods, the results are far more pleasing, as you can see below.
How the UK stock market has performed once dividends were reinvested**
| Over one year | +11.28%** |
| Over three years | +26.30%** |
| Over five years | +59.47%** |
| Over ten years | +83.74%** |
This difference is shown even more clearly on this chart:
So if you don't need dividends to supplement an income, reinvesting them can significantly impact your returns over time.
*Source FE Analytics, price returns in GBP of the FTSE All Share index, as at 16th August 2017.
**Source FE Analytics, total returns (includes dividends reinvested) in GBP of the FTSE All Share index, as at 16th August 2017.
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time.