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Jessica Kerry

Re-investing ETF dividends

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Hi there,

Its my first investing in ETFs. I don't trust myself with the dividends because I end up using them in things I hadn't even planned. Is there a way I can sign up to have the dividends automatically reinvested in the ETFs because this way I wont have to handle them?

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Hi Jessica,
Yes, reinvesting your dividends will grow your portfolio massively due to the power of compounding whereby your shares increase and consequently your dividends too. Unfortunately, most ETFs do not have a program that allows an automatic reinvestment of your dividends. The option available is to reinvest manually by buying more shares using the dividends paid.




However, some big providers give you two investment choices. There is the income share class ETF and the accumulating share class ETF. Picking the right one rests on your motive.
If you aspire to put your money in an Exchange Traded Fund, start by determining the appropriate share class. An accumulating share class puts dividends back into the fund. This will not cost you anything in the form of additional expenses.
On the other hand, an income share class will fund dividends from the pay-outs your ETF has reaped from underlying investments. An example is an FTSE-100 ETF making a pay-out of funds received as dividends from, say GlaxoSmithKline or Royal Dutch Shell.
If your objective in investing in an ETF is growth from your investment, and you do not want the income, your best choice is the accumulating share class. Conversely, the income share class is an excellent choice if you seek a regular income.
As you perform due diligence, remember to examine each share class by analysing respective performances. An accumulating share does appear more profitable than its income counterpart. That arises from dividends going into re-investment and subsequently compounding returns.



 

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