What’s the deal with dividends?

There’s more than one way an investor can make a profit from investing in shares. As well as increasing their share price, some businesses may also provide their investors with an extra sum of money. This is called a dividend.

What is a dividend?

A dividend is a way for a business to share its success with its investors. It usually works like this – if a company makes enough of a profit, it will give its shareholders a portion of those profits. Not every business will pay a dividend. But those that do will often do it regularly – yearly, quarterly or monthly.

It’s not just traditional companies that do it either. Mutual funds and investment trusts (like us) can also pay investors a dividend. We’ve been increasing our dividends every year for nearly 60 years, for example.

Earning a bit extra

Dividends offer lots of perks:

• Reliability. Dividends aren’t guaranteed. But, generally, their consistency means they’re recognised as one of the most reliable ways to grow your gains long term.
• Accessing income. Dividends are a key part of ‘income investing’ for a reason. They’re a simple way to generate a steady and easily accessible income from your investing.
• Tax efficient. Every year you have a small tax-free dividend allowance that you can take advantage of. And, even when you do pay tax on your dividends, you don’t have to pay National Insurance contributions on them.

Reuse, recycle, returns 

Of course, you can take the cash from your dividends right away. But reinvesting your dividends can be a smart move in the long run.

By using your dividend to buy more shares in a dividend-paying company, or fund, you accumulate more shares and can grow the income you get even further. That’s because those new shares you’ve bought will themselves pay out a dividend in the future.

This compounding of returns can make a real difference to the value of your investments over time.

As an example, If you received £200 in dividends and reinvested them your £200 could become £210 after 12 months. In the second year your £210 remains invested - and open to further growth. And this happens year after year, with any and all growth ‘compounding’, a bit like a snowball.¹

If you’d like to find out about Alliance Trust’s rising dividend, and how we approach income for our investors, you can find lots of detail on our website.

1. Example is based on 5% growth in the first year, nett of charges.

Past performance is not a reliable guide to future returns. Please note the value of investments and any income from them can go down as well as up. Your capital is at risk and you may not get back what you originally invested.

Towers Watson Investment Management Limited (“TWIM”), part of Willis Towers Watson, has approved this communication. This communication is intended for general information purposes only and it should not be considered a substitute for specific professional advice. In particular, its contents are not intended by Willis Towers Watson to be construed as the provision of investment, legal, accounting, tax or other professional advice or recommendations of any kind, or to form the basis of any decision to do or to refrain from doing anything. As such, this material should not be relied upon for investment or other financial decisions and no such decisions should be taken on the basis of its contents without seeking specific advice.