Reinvestment of dividends

Reinvestment of dividends

Reinvestment of dividends is the use of part of the profit of a joint-stock company received by shareholders in the form of dividends to replenish the capital of the company.
Reinvestment of dividends is a form of profit capitalization.

In English: Dividend reinvestment

Finam Financial Dictionary.

See what “Dividend reinvestment” is in other dictionaries:

Using part of the profit of a joint-stock company, received in the form of dividends, to replenish capital. Dictionary of business terms. Akademik.ru. 2001 ... Dictionary of business terms

Using part of the profit of a joint-stock company received by shareholders in the form of dividends to replenish the company’s capital; one of the forms of profit capitalization. Raizberg B.A., Lozovsky L.Sh., Starodubtseva E.B.. Modern economic dictionary ... Economic dictionary

Reinvestment of dividends Encyclopedia of Law

Reinvestment of dividends- (English reinvestment of dividend) the use of part of the profit of a joint-stock company received in the form of dividends to replenish its capital... Large legal dictionary

REINVESTMENT OF DIVIDENDS- using part of the profit of the joint-stock company, received in the form of dividends, to replenish its capital; one of the main forms of profit capitalization. Used to ensure growth, compensation or renewal of capital and obtaining... ...

REINVESTMENT OF DIVIDENDS- using part of the profit of the joint-stock company, received in the form of dividends, to replenish the company’s capital. See also Share capital... Legal Dictionary of Modern Civil Law

reinvestment of dividends- use of part of the profit of the joint-stock company received by shareholders in the form of dividends to replenish the company’s capital; one of the forms of profit capitalization... Dictionary of economic terms

REINVESTMENT OF DIVIDENDS, AUTOMATIC- investment of dividends in the purchase of its own additional shares, carried out in accordance with a plan approved by the management of the company. Shareholders increase the number of shares they own in this way. Reinvested dividends are subject to... Large economic dictionary

Reinvestment- (Reinvestment) The concept of reinvestment, the rate and reinvestment ratio, reinvestment of profits Information about the concept of reinvestment, the rate and reinvestment ratio, reinvestment of profits Contents Contents 1. in the dividend ... Investor Encyclopedia

Dividend reinvestment plan- Automatic reinvestment of shareholder dividends into additional common shares, often without charging a commission. Some plans involve purchasing additional shares at a discount to the market price. Reinvestment plans... ... Investment Dictionary

Nowadays, many novice investors have taken up the trendy trend of dividend investing. I wonder if they know that reinvesting dividends is a problem! And it’s not far-fetched, but quite real! I am sure that you do not even suspect where the trouble lies.

So, how does a young investor who has just started investing in dividend shares on the Russian MICEX stock market act now?

First of all, he finds shares himself or with the help of third-party resources that pay large dividends to shareholders based on the results of their work.

Everything seems fine at first glance! An investor with money received a profit from his investment. What can you regret here?!

And there is something to regret!

At first glance, receiving dividends is much more profitable than not receiving them. How logical it would be)))

But this is at first glance, until you encounter a problem - reinvesting dividends.

After all, if you are a young investor, then your capital is probably still too small to live on, and you will probably want to invest the money received in the form of dividends again in investments.

And then the question arises - where to invest the money received in the form of dividends? Of course, there are many investment options. But there is a very high probability that you will reinvest the money in the same shares of the company that paid you dividends (after all, you bought its shares because you are confident that it will grow and increase profits!). And what happens? It turns out that you received money from the company in the form of dividends and immediately invested it back. Moreover, on dividends, like on any other profit of a private individual, they paid a tax of 13%.

It turns out funny. You moved money from your left pocket to your right and at the same time lost 13% of the profit in taxes.

But reinvesting dividends, in addition to the problem of loss of profit on taxes, also contains the risk of a decrease in the rate of return.

What is this?

For example, today in the market it is considered normal to receive a yield of 8-10%, but if the Central Bank continues to lower the key rate, then in a year it may turn out that the market will already consider figures of 5-6% to be normal yield. As a result, you can invest your money, which you receive in the form of dividends for last year, back into shares with the same level of risk (and ideally into the same company back), only at a yield of 5-6%, since the price shares will rise. And in another year, he may see a full 3-4% return.

That is, in this case, you have a direct risk that you will no longer be able to apply the money received in the form of dividends at the same yield as a year ago and you will have to be content with a lower yield.

Well, we realized that reinvesting dividends is a fairly significant risk. But what to do about it?

The same logic tells us that it is possible not to pay dividends to shareholders, but to reinvest them directly into the company itself without transferring to/from the hands of shareholders. Tax savings in this case are visible to the naked eye.

Naturally, this opportunity is available only to companies that have something to reinvest their profits into. That is, only for growing companies.

For companies that are already developed and have taken up all possible market share, there is simply nothing to reinvest in. Consequently, MUAC tells them only one way out of the situation - to issue profits in the form of dividends to their owners (shareholders).

So if you are just starting to build your portfolio and will continue to do so for at least the next 5 years, then you should consider developing companies with great growth potential. But if you are planning to start living with capital in the very near future, then the option of investing in developed companies that pay large dividends may be more interesting for you.

I am in no way discouraging you from investing in dividend stocks! Still, dividend stocks are investments with a stable cash flow in the form of dividends. Otherwise, the price of the stock itself may increase, or perhaps due to some external factors it may remain at a low level for a long time, but you always want to eat.

Reinvestment of Dividends is the use of part of the profit of a joint stock company received in the form of dividends to replenish capital.

Dictionary of business terms. Akademik.ru. 2001.

See what “Dividend Reinvestment” is in other dictionaries:

Using part of the profit of a joint-stock company received by shareholders in the form of dividends to replenish the company’s capital. Reinvestment of dividends is a form of profit capitalization. In English: Dividend reinvestment See also: Capitalization... ... Financial Dictionary

Using part of the profit of a joint-stock company received by shareholders in the form of dividends to replenish the company’s capital; one of the forms of profit capitalization. Raizberg B.A., Lozovsky L.Sh., Starodubtseva E.B.. Modern economic dictionary ... Economic dictionary

Reinvestment of dividends Encyclopedia of Law

Reinvestment of dividends- (English reinvestment of dividend) the use of part of the profit of a joint-stock company received in the form of dividends to replenish its capital... Large legal dictionary

REINVESTMENT OF DIVIDENDS- using part of the profit of the joint-stock company, received in the form of dividends, to replenish its capital; one of the main forms of profit capitalization. Used to ensure growth, compensation or renewal of capital and obtaining... ...

REINVESTMENT OF DIVIDENDS- using part of the profit of the joint-stock company, received in the form of dividends, to replenish the company’s capital. See also Share capital... Legal Dictionary of Modern Civil Law

reinvestment of dividends- use of part of the profit of the joint-stock company received by shareholders in the form of dividends to replenish the company’s capital; one of the forms of profit capitalization... Dictionary of economic terms

REINVESTMENT OF DIVIDENDS, AUTOMATIC- investment of dividends in the purchase of its own additional shares, carried out in accordance with a plan approved by the management of the company. Shareholders increase the number of shares they own in this way. Reinvested dividends are subject to... Large economic dictionary

Reinvestment- (Reinvestment) The concept of reinvestment, the rate and reinvestment ratio, reinvestment of profits Information about the concept of reinvestment, the rate and reinvestment ratio, reinvestment of profits Contents Contents 1. in the dividend ... Investor Encyclopedia

Dividend reinvestment plan- Automatic reinvestment of shareholder dividends into additional common shares, often without charging a commission. Some plans involve purchasing additional shares at a discount to the market price. Reinvestment plans... ... Investment Dictionary

For many investors with assets that pay dividends, reinvesting them is commonplace. The benefits of this procedure are not always “on the surface”. Many investors, especially those who hold dividend portfolios, consider dividends received as one of the main sources of income (for example, for retirees or for people who live off passive income). For them, reinvesting dividends is irrelevant. For other investors, dividends are one of the sources of funds for regularly replenishing their portfolio.

In foreign stock markets, programs (or plans) for reinvesting dividends have been invented and implemented. Because not every investor needs dividends as a source of current income, many large companies offer the opportunity to automatically reinvest dividends in their additional shares.

Reinvestment is offered by both companies issuing shares and foreign brokers.

Reinvestment through a company

In the US, the most profitable option is to reinvest dividends through the company issuing the shares. In this case, there will be no commission for the purchase of additional shares or brokerage commissions. In some cases, a discount to the price of securities may be offered.

This option also has complications. Firstly, not all companies offer this reinvestment option. You will have to negotiate directly with each of them and enter into an appropriate agreement. This is only suitable for those who are really committed to Buy & Hold, because... You won’t want to sell such shares even in six months or a year. Secondly, there are no funds (neither ETFs nor mutual funds) among the companies offering reinvestment plans. Thirdly, and this is probably the most important thing for Russians, companies offering reinvestment plans work only with residents (in the USA - with citizens).

Reinvestment through a broker

But there are also plans for reinvesting dividends, which are offered by foreign brokers to their clients as a service. In the US this is called the Dividend Reinvestment Plan (DRIP). The principle of DRIP is that dividends received by investors from a company are automatically reinvested in additional shares of that company on the dividend payment date.

The main advantages of DRIP:

• No brokerage commission paid*
• Fractional (incomplete) quantities of shares are purchased
• DRIPs can include stocks, ETFs, and exchange-traded mutual funds.
• Money is reinvested on the day the dividend is received and does not lie idle

* - individual brokers may have special commissions associated withDRIP(check terms and conditions with your broker)

There are also some disadvantages associated with DRIP plans:

• Shares are always bought - even at times when an investor would decide not to buy anything (for example, during a stock market crisis)
• The investor cannot control the price of acquiring additional assets
• DRIP reinvestments do not help with portfolio rebalancing**

** - this means that the money received in the form of a dividend is automatically spent on the acquisition of an asset of the same name. While, guided by the rebalancing rules, the investor would purchase a cheaper asset.

In our opinion, for long-term portfolios and passive investments, DRIP still has more advantages, since the problem of a passive investor has always been the ability to quickly reinvest newly released funds. Money should not “lie idle.” The DRIP plan allows you to quickly and easily solve this problem, saving on commissions, even if the money is not reinvested in the most optimal way. Once or twice a year, the situation with a violation of the proportions of assets in the portfolio can be easily corrected “manually” by selling and buying the necessary securities.

Reinvestment of dividends in Russia

In Russia, no one can offer such services to private investors yet. Neither Russian brokers nor public companies have developed the concept of dividend services to such an extent. This is not surprising. On the Russian securities market, there are less than 100 companies that paid dividends for 2017, while in the United States the number of such companies is in the thousands. Also, a large number of ETFs pay dividends in the US, not once a year, but up to 12 times.

In Russia, neither exchange-traded funds (which can be purchased through a Russian broker, nor Russian mutual funds pay dividends. As a result, plans similar to DRIP are simply not relevant for passive investors in Russia.

Therefore, only shares of public companies that are currently popular with investors and not only because of receiving dividends are suitable for reinvesting dividends on the Russian market.

Once dividends are received into the brokerage account, the investor is faced with the question of whether to invest them or use them for other purposes, for example, as cash. Those who choose to reinvest dividends do it themselves “manually”, since Russian brokers do not offer reinvestment plans. Some large brokers have services to connect to certain strategies (auto-follow and other options) in which dividends are reinvested. These strategies are designed for beginner investors, but the commission in them will significantly reduce part of the profitability.

Does the portfolio grow with reinvestment?

The undoubted advantage of reinvesting dividends is that the investor’s portfolio is regularly replenished with small amounts, and this in the long term will have a positive impact on the final value of the entire portfolio. If dividends are received regularly, for example, monthly, then the portfolio’s return will be greater than with annual reinvestment of dividends or without reinvestment at all. This can be clearly seen in the graph where these three options are presented.

The histogram shows the growth of a portfolio with a total average annual return of 17% per annum in rubles (7% dividend yield, 10% price yield) over 10 years.

The role of brokers in reinvestment

Each foreign broker has its own characteristics when connecting to a dividend reinvestment plan, which it is advisable to familiarize yourself with in advance. Most DRIP programs do not allow you to reinvest amounts of money from a brokerage account that are less than $10. Foreign brokers that work with Russian residents (more details in the US Broker Review 2017) can also connect to DRIP programs. Moreover, each broker may have its own set of conditions. Thus, with some brokers you can immediately select the DRIP service when purchasing each asset. Further, this plan will be applied specifically to this asset. Other brokers have the ability to connect DRIP only to the entire portfolio at once, and then disconnect individual securities from the plan.

What securities pay dividends?

With the Russian securities market everything is clear and simple. On the stock exchange, dividends are paid only to holders of shares of public companies. The downside of Russian dividends is that it is impossible to predict whether the company will pay dividends next year or not (not to mention long periods). So far there is not a single company that pays dividends from year to year without interruption, increasing the size of dividends at least by the amount of inflation. Therefore, in order to receive dividends from Russian companies, a private investor needs to constantly “keep abreast”, follow the news, evaluate the company’s performance for the year, etc. This is not entirely convenient for many investors.

In the United States, thousands of companies, real estate trusts (REITs), mutual funds and ETFs pay dividends. Dividends are most often paid quarterly, and in some cases - monthly. For large US companies, it is a matter of prestige not only to pay dividends, but also to annually increase the amount of dividends paid. At the time of publication (in 2017), the yield on dividend payments of large American companies is not high (within 2-5% per annum in US dollars). But a feature of American dividend companies is the stability and predictability of such payments. In the United States, the S&P 500 Dividend Aristocrats Index has been formed and is very popular. The index includes the largest American companies that have paid dividends annually for at least 25 years without interruption and at the same time increased their size every year.

Taxes on reinvesting dividends

Tax on dividends paid is one of the most popular types of taxes around the world. Double Taxation Agreements between Russia and other countries pay special attention to this type of tax. As a rule, the foreign tax agent withholds this tax from Russians in the amount of 10% (for the USA) to 15%.

When connecting to the DRIP program, an investor should not forget about paying tax on dividends, because This program does not imply the exclusion of tax consequences when receiving dividends. If the withholding tax on a dividend exceeds the tax rate in the Russian Federation (13%), then there is no need to pay anything extra to the budget. But an investor should still file a tax return, because... There is an obligation to declare any tax received abroad. We talked about calculating the tax on dividends from foreign assets in the article Filling out the Z-NDFL for dividends from foreign investments.

Selection of dividend assets

Selecting securities that are most profitable in terms of dividend payments is a big and painstaking job for the investor. For this purpose, dividend portfolios are created that can regularly generate income and complement the price growth of the portfolio over long-term investment horizons.

With the help of reinvesting dividends in a fairly long term, compound interest begins to actively work, due to which a noticeable increase in the profitability of the investor’s portfolio is achieved.

In conditions of instability of world markets, choosing dividend securities and including them in a portfolio, in our opinion, is one of the ways to reduce market risks. And for those who dream of passive income (and not necessarily during a well-deserved retirement), the study and implementation of dividend strategies is a hot topic.

An investor's income from shares consists of two things: price growth and dividends. With the dividends received, the investor can buy more shares, receive even more dividends on them next year and buy more shares again, and so on ad infinitum. It is called reinvestment of dividends. Thus, the shares will increase in your account almost on their own.

Stock indices show only changes in market prices and do not take into account dividends. Therefore, from the point of view of total return, indices are not reliable indicators. To confirm these words, just look at the American S&P 500 and its version, which takes into account the reinvestment of dividends S&P 500 Total Return . When investing for the long term, dividends can significantly outperform the index return if reinvested.

Impact of dividends on stock returns

If you look at 100 years (1900-2000), the total return consisted of 5.47%, which came from price growth and 4.95%, which came from dividends. Their contribution to the overall result was almost half. $1 invested in the S&P 500 in 1900 would be worth $216 in 2000. Reinvesting dividends would increase $1 to $2,225, which is 10 times more!

The stock market is not always growing. There have been periods in the history of stock markets when their prices did not grow for a long time, but simply fluctuated in some range. This is, for example, the American S&P 500 in 1906-1924, 1937-1950, 1966-1982. or the MICEX index 2011-2014 (presumably). These are the so-called side markets- a period when market fluctuations can exhaust all the nerves and extinguish the hope of many investors. After all the ups and downs, the investor ends up back in the same place he came from. Sometimes Mr. Market likes to make fun of him. In this case, the only source of income for the investor becomes dividends.

In sideways markets, the role of dividends increases significantly, since in conditions when share prices do not grow, they become the only income that the investor receives. Their contribution to the overall result in this case can reach 90%.

After peak values ​​in 1929 and the subsequent crash, which was called, the American Dow Jones stock index returned to its previous values ​​only in 1954, that is, 25 years later. Despite this, returns for investors who received and reinvested dividends were greater than zero, as they returned an average of 5.6% over this period. Investors who buy securities only in anticipation of an increase in market value risk not receiving any income at all.

Investors who buy dividend securities diversify their income, so even in the event of a prolonged decline in prices, they will be able to count on cash flow in the form of dividends.

Dividend Aristocrats

In the West, a term was invented for stocks that have been regularly paying dividends for many years - There is even a special index S&P 500 Dividend Aristocrats Index. It includes securities of companies that have paid and increased their dividends annually for at least 25 years. When you compare it to the regular S&P 500 total return (which takes into account dividend reinvestment), the Aristocrats' returns far outperform the broader index.

That is, dividend stocks are more stable and have greater long-term growth potential compared to other securities.

Dividend yield of US stocks S&P 500

Income securities become most attractive during a crisis, since at this time share prices fall and dividend yields rise. Below is a graph of the dividend yield of US S&P 500 stocks. The average dividend yield of the S&P 500 index over more than 100 years was 4.34% and most of the time it was between 3% and 6%. Over the past 10 years, US stocks have returned just 2%. If you look at history, during crises the yield increased greatly due to falling prices. A crisis is the best time to buy profitable stocks.

Dividend yield of Russian shares included in the MICEX index

Data on dividend yields of Russian stocks vary. We can only say that it fluctuated in different years from 1 to 6%. It was only during the 2008 crisis, when share prices fell, that dividend yield increased by more than 10%. On average, the dividend yield of the MICEX index was about 3%.

How did reinvestment of dividends affect the profitability of the MICEX index? 100 rubles invested in the MICEX index in 1997 would have grown to 1,633 rubles in 2014. In total, from 1997 to 2014, 516 rubles of dividends were received. Taking into account their reinvestment, investments would increase to 2,650 rubles. That is, reinvesting dividends improved the result by 62%.

According to the Arsagera Management Company

The graph below shows the profitability of the MICEX index and two indices of dividend shares compiled by Dokhod Investment Company.

• Dohod DPI (Dividend Price Index) – shows the dynamics of the price of dividend shares excluding dividend payments;
• Dohod DTRI (Dividend Total Return Index) – total return index that takes into account the reinvestment of dividends.

The MICEX index fell by 20% during the investment period, while the price of dividend shares fell less, and reinvestment of dividends brought positive returns.

In the end, follow two simple rules:

• buy dividend stocks, especially during a crisis
• reinvest dividends