Compounding is the holy grail of investing we are told to ignore at our peril. To take full advantage, reinvesting dividends is crucial, but if you're buying shares for your Isa through a platform, watch out - as some brokers will sting you hard for the privilege, while others could turn compounding into one big hassle.
Last week, a reader wrote in complaining his Isa provider wouldn't let him automatically reinvest dividends from investment trusts. His broker, Sippdeal, is the only major broker not to offer the service.
With open-ended investment companies (Oeics) and unit trusts this wouldn't cause any bother because investors have the option between 'Inc', which pays dividends out as income, and 'Acc', which automatically pays them back into the fund, so the money accumulates. But shares (including investment trusts) do not come with this option and are treated differently on platforms. While most do give you the option for automatic transfer, unfortunately, extra charges sometimes apply which will eat into the profits your investment trusts are making.
Fidelity analysis shows thousands of investors have received the vast bulk of their return in the form of reinvested dividends. For example, a stake of £1,000 invested in newly issued BT shares on 30 November 1984 would today have a face value of about £3,800. But shareholders who reinvested their dividends in BT shares would have received a whopping total return of £15,495, including their original £1,000 stake.
But if you're using a platform that has restrictions on dividend reinvestment - or doesn't offer it at all - this could prove problematic and will eat into potentially exciting returns.
For example, for investors with smaller amounts of money invested, Hargreaves Lansdown's Isa could prove a problematic place to store investment trusts. Sure, it offers automatic reinvestment of dividends on shares, but only if the dividend is over £200. If it's smaller, the investor has to manually reinvest it at a 1 per cent charge, but with a minimum charge of £10. So if your dividends are likely to be less than £200, reinvesting them works out very expensive. And, you'd probably have to sit and wait for them to accumulate, in which time you'll be losing out as you'll be holding less of the shares that could be producing yet more dividends.
And, while Alliance Trust Savings doesn't have a restriction on minimum amounts (meaning it could be a better option for people with lesser amounts invested, it penalises investors that don't have a computer at home. Automatic dividend reinvestment only costs £1.50 a pop if you do it online, but if you arrange it over the phone or by postal correspondence, it'll cost you £5.00 instead. And if you want to reinvest a one-off divided, it'll cost you £12.50.
Fidelity ShareNetwork offers automatic dividend reinvestment at no extra cost which could make it a good option if you hold a large number of investment trusts and shares.
Sippdeal doesn't offer automatic reinvestments at all, but it does offer manual dividend investment on a wide range of shares and investment trusts relatively cheaply (£1.50). A spokesperson from Sippdeal said: "We are aware we don't offer automatic reinvesting, but we don't currently have the facilities for it. However, we are looking at introducing such a feature at some point in the future - we just can't say exactly when."
Are automatic dividend payments always a good idea?
Automatic dividend reinvestment is less time-consuming, so if you're a very busy person it's probably the best option. But if you've got a bit of extra time on your hands, it might not always be the best option. Re-allocating capital yourself can be a good way to keep a close eye on the performance of your portfolio, and place money where it's most productively used.
Major brokers' Isa rules on dividend reinvestment
| Isa provider/broker | Automatic dividend reinvestment? | Automatic dividend reinvestment cost | Cost of manual dividend reinvestment | Lower limit on manual dividend reinvstment |
| Sippdeal (AJ Bell) | No | £25 per month | ||
| Hargreaves Lansdown | Yes but only for dividends above £200 | 1% of the amount being reinvested (min charge £10, max charge £50) | 1% of the amount being reinvested (min charge £10, max charge £50) | No minimum |
| Fidelity ShareNetwork | Yes | Free | Free | No minimum |
| TD Direct Investing | Yes but only on FTSE 350 stocks, and dividends must be worth over £10. | £1.50 | TD’s standard trading charges start from £5.95 when you trade an average of 20 times over 3 consecutive months. Otherwise it's £12.50. | No minimum |
| Alliance Trust Savings | Yes | £1.50 per reinvestment online, and £5.00 if you do it over the phone or by writing in. | £12.50 per trade | No minimum |
