Here’s my dividend strategy for beating the State Pension

Reinvesting dividends can boost your total pension investment returns. But what options are there for doing this?

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

According to a study by Barclays, if you’d invested £100 in the UK stock market in 1945, and reinvested all your dividends, you’d have a stunning £180,000, even after inflation. That’s the power of dividends.

But how do you actually go about re-investing dividends, which will often be relatively small amounts?

Scrip

A friend of mine has some shares in an employee-based scheme, and he takes his dividends as scrip — so instead of cash, he gets the equivalent in new shares. If it’s a fractional number, the remainder is held and combined with the next dividend.

Should you invest £1,000 in Aveva Group Plc right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Aveva Group Plc made the list?

See the 6 stocks

That’s a cost-effective way to reinvest, as there are no charges to pay, so even very small amounts can be taken in shares. A typical broker’s fee could be a big percentage of a small dividend sum.

Unfortunately, the scrip route is closed to many of us who use nominee stock broker accounts. Many (including mine) don’t provide the option of taking scrip dividends — and a lot of companies don’t offer scrip anyway.

DIY

So we have to take our dividends as cash and then buy more shares ourselves. That raises a number of questions, most importantly how much to accumulate before it becomes cost effective to reinvest it?

As an example, last month, one of my investments paid me a dividend of £55.60. My broker charges a flat £10 for a share purchase, so I’d never invest such a small sum as I’d instantly be down 18% just from the transaction cost.

So I let my dividend cash build up until a £10 charge accounts for a sufficiently small percentage as not make much of a dent in it. Only then do I buy new shares. But what’s a sensible minimum?

Cheap dealing

I see around £1,000 as a good sum, meaning the dealing charge amounts to a modest 1%, which I reckon is well worth paying. Some people will be happy with less than that, and even as little as £500 would leave me with a 2% charge — I could live with that if I saw an unmissable purchase. So somewhere between those limits will typically be my minimum.

And some accounts even offer charges so low that you could get away with purchases of around £200. But they pool investors’ cash and typically only deal on a couple of days each month.

What to buy?

Then what to buy? More of the same shares, or a new stock altogether?

Reinvesting in the same shares might seem to be the obvious way to maximise the return from a specific investment. But if you’ve pooled dividends from a number of stocks, it might not be obvious which to go for — perhaps each in rotation every time you have a new investment allocation.

Consistent strategy

But my dividend reinvestment purchases always follow the same criteria as any new money in my pension or ISA, and I stick with my usual strategy regardless of the source of the cash.

My most recent example is an investment in Sirius Minerals, which was top of my shortlist after one of its regular price dips, just as a dividend came in, and took my cash to a cost-effective amount.

What you buy is up to you, but it does seem clear that reinvesting dividend brings in the best rewards.

Of course, there are plenty of other passive income opportunities to explore. And these may be even more lucrative:

We think earning passive income has never been easier

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Alan Oscroft owns shares of Sirius Minerals. The Motley Fool UK has recommended Barclays. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

US stock market rout: an unmissable opportunity for investors?

His tech-heavy portfolio has been smashed by Trump’s tariffs. However, Dr James Fox believes there could be some opportunities in…

Read more »

Investing Articles

After a 13% ‘Trump tariff’ fall, is the Barclays share price too cheap to miss?

Does the Barclays share price fall mean we should all panic and run screaming from the stock market? Nah, of…

Read more »

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Investing Articles

2 investment trusts to consider for a Stocks and Shares ISA

These two investment trusts have a different focus -- but our writer sees both as worth considering, one more for…

Read more »

Investing Articles

Deutsche Bank reiterates Buy rating on 9.6% yielding FTSE 250 stock that was “most shorted in UK”

Our writer investigates why a major broker remains optimistic about a FTSE 250 stock that was once the most shorted…

Read more »

Investing Articles

2 things to remember when stock markets are turbulent

US trade policy has rattled the stock markets in New York, London and elsewhere. Our writer outlines a couple of…

Read more »

Investing Articles

Are Trump’s tariffs a once-in-a-lifetime chance for ISA investors to get rich?

The £20,000 Stocks and Shares ISA limit will reset on 6 April. Smart investors could use current market volatility to…

Read more »

Investing Articles

Here are the latest Persimmon share price and dividend forecasts

Our writer looks at the latest forecasts for the Persimmon share price and considers what level of dividend the stock…

Read more »

British Pennies on a Pound Note
Investing Articles

Up 900%, could penny share Kodal Minerals have further to run?

Over five years, this penny share has increased in value by a factor of 10. Could the latest news persuade…

Read more »