Up to 7.5 million investors could be missing out on thousands as Aberdeen dividend research highlights the true power of compounding

Aberdeen, the global asset manager calculates that millions of investors are potentially compromising long-term returns by not reinvesting dividends.

For investors going for long term growth (as opposed to income seekers), reinvesting dividends is a key part of total return. According to Aberdeen’s research*, 42% of UK investors either said ‘no’ or ‘don’t know’ when asked if they are reinvesting their dividends, extrapolating to 7.5 million investors in the UK.

Analysis by Aberdeen looked at nine major markets over a ten-year period and the impact of reinvesting dividends on returns if an investor had started with a £10,000 lump sum investment.

The biggest difference between total return (reinvesting dividends) versus capital return (not reinvesting dividends) was seen in the Dow Jones Index, which delivered £37,016 on a total return basis over 10 years versus £29,651 on a capital return basis (when not reinvested), a difference of £7,365 over 10 years. 

Some maybe surprised to see the Dow Jones Index lead here given the US is not typically associated with dividends and shows the compounding effect of the higher total return on the Index’s performance.

Whilst the S&P500 Index delivered the largest total return on £10,00 invested over 10 years at £41,485 versus £34,699 on a capital return basis, the difference between capital and total return was smaller at £6,786.

The FTSE World Index came third, at £32,002 returns on a total return basis vs £25,439 on a capital return basis; a difference of £6,563.

The difference between was most stark when looking at the AIM market. AIM only delivered positive returns after 10 years, and that was only on a total return basis i.e. when dividends were reinvested, returning £11,335 versus  £9,851 when dividends weren’t reinvested.   

Interestingly, the FTSE100, often famed for its dividends, came in at number five in Aberdeen’s analysis. Over 10 years it provided a total return of £18,548 versus £12,682 on a capital return basis; a difference of £ 5,866.                                                                                                                                        

Ben Ritchie, Head of Developed Market Equities at Aberdeen, said: “Reinvesting dividends is key to long-term returns. While the impact has been seen over the past three and five years, it’s not until ten years that the true magic of compounding really kicks in and delivers, assuming that markets are moving in the right direction –  upwards.

“Albert Einstein supposedly described ‘compound interest’ – otherwise known as dividend reinvestment – as the “eighth wonder of the world”, to explain how returns can snowball over time, and our data shows why.  Many income investors rely on their regular dividends to meet their outgoings, and it’s a huge privilege to help them do that through our equity income strategies. But it is compound interest that helps get portfolios to sufficient scale so they can reap the income rewards later on.”

Investors going for growth should check they are automatically reinvesting their dividends and for fund investors, it’s worth double checking they are in the right share class (INC for income and ACC – meaning accumulation – for growth investors).

Captial Return versus Total Return, £10,000 invested returns in Sterling (ranked by biggest difference between capital and total returns over 10 years)