What are dividends and why do they matter?

What is a dividend?

A dividend is a sum of money that is paid out by a company to anyone that is a shareholder. Generally speaking, this dividend is based on the profits that company has made in that particular year. Even if you hold one share, you will be entitled to a dividend, if one is paid.

As an example, Company A has 100 shareholders each with one share. At the end of the year, the company has made £100 in profit. Each shareholder would then be entitled to receive £1 of that profit in the form of a dividend.

The reality is obviously far more complicated. Companies generally decide to pay out less than their profits in dividends such that they may retain some profit for the future. This can then be used to fund future investment or company growth. In other instances companies may pay out more than their profits in expectation of higher future profits.

Why dividends matter

The dividend is one of if not the primary form of return for shareholders and is a critical contributor to investment performance.

The chart below highlights the difference dividends make to total returns:

Source: ThomsonReuters Datastream, investore Research

The top line shows what an investment of £10,000 in the FTSE100 index would be worth if you consider both the change in the share prices and the dividends received. It also assumes that the dividends received are reinvested on the date of receipt (i.e. used to purchase more shares).

The bottom line, in comparison, is the change in the share prices excluding the impact of dividends. Dividends therefore contributed more than £5,200 of the total return ending the period at £16,824 compared to a less inspiring £11,591 for the index excluding dividends.

As illustrated, it is clear that dividends make a substantial difference to returns over the long run. Our Dividend Income plan looks to take advantage of this reality by providing investors with dividends even greater than those offered by the total of the FTSE100. We do this by focusing solely on the shares that are paying strong and reliable dividends.

Invest now and see the power of dividends in action.

This article does not constitute advice. The value of your investment and the income derived from your portfolio is not guaranteed and can go down as well as up.

Savings and Investments

Both words relate to the use of money but fundamentally they are different concepts.

Savings are your short term access accounts that are used day to day. These accounts do not generally pay a high rate of interest but they are considered secure and you can access the money at short notice.

Investments are considered more longer term. Committing your money to an asset in order to grow the value in a greater way over a longer timeframe.

Your main residence is an investment for example.

The main difference between the two concepts is risk. The risk that you will lose money.

A savings account is unlikely to lose you money but it is also unlikely to make you money.

An investment could lose you money but it may also make you money over the long term. Particularly if you understand the investment you are making.

We understand investments and are committed to bring you brilliant, yet simple plans to benefit from the rewards that could be achieved from investing over the long term.

Watch our dividend income video to find out more about our latest plans 

This article does not constitute advice. The value of your investment and the income derived from your portfolio is not guaranteed and can go down as well as up.

The Effects of Fees on Investment Returns

What exactly is the effect of fees on your returns and why should you be focused on keeping costs low? It all comes down to compounding.

Sure, that annual fee that your standard active fund manager charges may only seem like a drop in the ocean now, but over time, thanks to compounding, the fee looks far more significant. Think about it, every penny more paid away in fees is a penny less earning a return.

Consider the following; retail investors are primarily presented with a number of options all with differing annual on-going fees:

  • Typical Financial Advisor –2.25% fee, varying initial fees.
  • Direct Investment (e.g. Hargreaves Lansdown) – 1.8% fee.
  • Robo Advisor (e.g. Nutmeg) – 0.94% fee.
  • Investore Dividend Income – 0.5% fee.

If you invested £50,000 into the four different providers above and saw the same rate of return across them all (let’s assume 6.5% annually), the investment in the Dividend Income plan would be worth £15,360 more after ten years than the investment with the typical financial advisor. After 30 years the difference balloons further to £114,583! (Please note the return calculations are based on total returns and the Dividend Income calculation assumes all income is reinvested).

Here’s how that looks:

Investment fees vary wildly but we at investore are focused on providing our brilliantly simple solutions at one low cost. Keep more of YOUR returns and join the investore revolution today.

This article does not constitute advice. The value of your investment and the income derived from your portfolio is not guaranteed and can go down as well as up.

The Effect of Inflation on Your Investment

The Effect of Inflation on Your Investment

What is inflation and why should you be concerned about its effect on your investments?

Inflation is officially defined as the sustained rise in the general level of prices of goods and services in the economy. On a basic level it could refer to a simple product like milk rising in price from 50p per pint in one year to 55p per pint in the next. On a more high-level basis it could refer to rising costs of living, housing and healthcare.

When considering what investment returns you require (or desire), it is essential to consider the effect of inflation. For example, someone whose day to day costs are £2,000 per month at the moment should expect them to be significantly higher in 10 years time. In fact, if the last ten years are anything to go by, living costs of £2,000 in January 2007 would have risen to nearly £2,500 in January 2017.

Another way of looking at it is to consider investment returns after factoring in inflation by considering how much an investment can buy in goods and services today compared to the future. If, for example, an investment of £1,000 was invested for a year at a 10% return, the final value after a year would be £1,100. However, if during the year the price of goods and services increased by 5%, the price adjusted or ‘real’ return would have only been 5% (the 10% return less the 5% rise in the cost of goods and services).

The below chart illustrates this price adjustment or ‘real’ rate of return over the long term at different rates of inflation. 

Source: investore Research

As highlighted, inflation can erode returns significantly.
So how should you protect yourself?

Different asset classes provide varying degrees of protection to inflation. Equities, however, are often cited as being one of the best long term defences. Intuitively this makes sense. On a basic level, by investing in shares of companies, as the price of goods rises so to do the profits the companies earn on those goods and in turn the returns to shareholders.

The current environment of low rate cash ISA accounts and fixed savings mean millions of investors are seeing their ‘real’ investment returns turn negative. The investore dividend income plan, conversely, invests in equities and, seeks to provide long term investors with a sustainable plan to beat inflation.

This article does not constitute advice. The value of your investment and the income derived from your portfolio is not guaranteed and can go down as well as up.

What is the FTSE100?

To understand what the FTSE100 is, it is worth understanding what a share index is first. Essentially an index is a list of companies’ share prices that are grouped together due to one or many similar characteristics. An index collates the prices of all the shares in the index and provides a single value for the total change in the shares as a whole. Indexes are used to gauge the overall sentiment of a market or sector as they provide a combined overview of large groups of shares.

The FTSE100 index, or just ‘Footsie’ is a share index of the 100 largest companies with shares trading on the London Stock Exchange. The companies that make up the FTSE100 are also sometimes referred to as blue chips which is defined by Merriam Webster as a share ‘of high investment quality that usually pertains to a substantial well-established company and enjoys public confidence in its worth and stability.’ Generally the companies in the FTSE100 are well known and recognisable.

Best known shares in the index include Royal Dutch Shell, Rolls Royce, HSBC, Marks and Spencer, GlaxoSmithKline and Unilever.

This article does not constitute advice. The value of your investment and the income derived from your portfolio is not guaranteed and can go down as well as up.