Gilesyb27 wrote:My question: I know dividend reinvestment is vital to long term returns but wondered how people do it?
I just let the cash accumulate within my broker account until I've got enough for a purchase, then select what I reckon is the best share for the dividends to be reinvested in (taking yield, dividend safety and the diversification of my HYP into account) and purchase that share. Note that while dividend reinvestment is important, it's
only the fact that dividends are reinvested that's important. In particular, there is nothing magical about reinvesting them in the share that produced them - indeed, if the share that produced them has become a poor income investment choice, it's important that they're
not reinvested in it, but in something that is now a good income investment choice. (Of course, one cannot
know which income investment choices are good and which are poor - one just has to come to the best judgement one can on the matter and act accordingly.)
And by the way, when I say "the cash", I mean
all cash that is going into purchasing shares for the HYP, not just dividends. Dividends, corporate action proceeds, regular savings, lump sums (e.g. from inheritances) - they're all grist for the mill... In particular, for someone who is just starting on building their HYP, the stream of dividends will just be a tiny trickle that on its own would take years to build up to enough for a cost-efficient purchase. But it probably isn't on its own, as someone in that position ought to be making regular savings as well. The regular savings ought to build up to a sum that can be invested cost-efficiently reasonably quickly - say within a few months - and the dividends speed that up a bit, so they should only hang around uninvested for a few months, not years.
Of course, things don't always go according to plan, and it's possible that someone might set out to build a HYP using regular savings and dividend reinvestment, then in the very early years find themselves unable to put in the regular savings and so building it with dividend reinvestment alone. In such circumstances, cash might accumulate very slowly and only get up to a cost-effective sum for a purchase every few years. In those circumstances, using automatic reinvestment in the shares that produced the dividends and accepting the fact that they might not be the best shares might be less bad than leaving the cash sitting around uninvested for a long period.
But that's a comparatively rare situation - I would expect most HYP builders to have a reasonably rapid stream of cash to make purchases with arriving from regular savings, dividends, or both. Even some HYPers in the 'income-drawing' phase will have such a stream of dividends if they've got a good safety margin of the income their HYP is producing over the income they need to draw, have adequate cash reserves for emergencies and to see them through any likely period of low dividend income, and don't have anything else they want to do with the surplus income while dividend income remains high.
Gengulphus
All held in ISA or SIPP so tax not an issue.
