Letting dividends do their compounding magic

36-year-old Richard is reaping the benefits of being early with his investment journey

Learning good habits at an early age can pay dividends later in life, as Richard from North Somerset has found out. The investor regularly reinvests dividends from his portfolio to compound his returns.

Rather than spend the cash now, he would rather use it to buy more shares so the next round of dividends might be even bigger than the last.

Richard is 36 years old and works as a locum for a pharmacy. His father taught the healthcare specialist the importance of regular savings and encouraged him to set up a savings plan when he started work aged 18.

At the time banks offered a decent rate of interest so Richard began putting away cash each month with the intention of building up enough to fund a deposit for a house.

When interest rates started to fall in the 2000s Richard was concerned his money was not working hard enough and went into his local bank branch to voice his concerns.

The bank suggested he contact a financial adviser. They recommended that Richard invest part of the cash he had built up into the stock market so it could work harder. In the following years he put the money to work via equity funds while also keeping a cash reserve.

Seeking Professional Advice

During the global financial crisis in 2008 Richard became concerned when he saw the value of his funds falling, so once again contacted the financial adviser.

The advice from the qualified expert? Consider investing more money because history suggests the stock market will recover and move higher. He liked this idea, so when people were panicking and selling shares, Richard was steadily buying more.

That proved an important lesson because a couple of years later the stock market was again moving higher. The experience instilled in Richard a long-term mindset.

Fast forward to the Covid-19 pandemic and Richard instinctively knew what to do when stock markets crashed in the spring of 2020.

Richard put money into Baillie Gifford US Growth Trust (USA). From the March 2020 low the share price of the investment trust nearly tripled in the space of 11 months.

Believing the gains would not be sustainable Richard sold a portion of his shares to lock in gains while leaving the rest invested.

Having originally invested £16,000 he was able to sell a portion worth £20,000 and keep the remaining £10,000 stake invested in the fund. Richard then decided to ring-fence around £4,000 of the proceeds to invest in individual stocks.

Riding The Ups And Downs

The pharmacy locum says he liked the idea of putting money into the Baillie Gifford trust and other growth-oriented trusts because of his age. He reasoned he could afford to take more risk to achieve faster growth because he had time to ride out any bad periods in the stock market.

The pandemic was also the trigger for the investor to dabble in individual shares as well as funds. Once Richard started investing in individual shares, he found value investing was far more satisfying than growth investing. However, he still used the bulk of his annual savings each year to add to growth-oriented trusts.

He says: ‘Receiving dividends and reinvesting them allows you to see compounding at work because you end up owning more shares. By contrast, growth shares often do not pay a dividend and you must rely on capital growth.’

Oil And Gas Interests

One share which Richard has purchased and then topped up is Nigerian oil and gas company Seplat Energy (SEPL). He says he likes the 8%-plus dividend yield and the quarterly payout.

Richard purchased the shares before the energy crisis at around 70p per share and as of 9 February 2023 they trade at 110p. He also invested in oil and gas groups Shell (SHEL) and BP (BP) but sold out of Shell to buy more shares in Seplat.