Here’s a question with big implications for UK shares: is a simple or total return strategy smarter? I’ll be honest: in a domestic context, I assumed that more often than not, reinvesting dividends back into a stock must create more value than taking the same distributions as income.
Capital gains may look anaemic against leading American or all-world indices, which have seen compound price rises of 13.7 and 9.7 per cent a year since 2014. But even in the FTSE, the long-term trend remains up and to the right. And while dividends are off their 2019 highs, payouts are up over time. Surely, you’d think, buying increasingly large chunks of a rising market must multiply returns?
Well, maybe. Unless a stock goes to zero, then mathematically, a total return strategy will always beat share price returns. However, there are often times when income largesse precedes capital meltdown.