Today, the Amateur Investor purchased shares in three companies and they didn’t require me to pay money into my dealing account. How would you like some “free” shares?
It sounds too good to be true, right? Wrong!
But how is it possible for you to get some “free” shares too?
Simple. Dividend reinvestment.
Today saw the cash balance in my shares account boosted by a dividend payment from National Grid (NG.) and it was this dividend payment that was used to purchase some “free” shares.
OK, so perhaps “free” is the wrong word. But I didn’t have to commit new funds to the share account to make these purchases.
Now if you have a small holding in a company, the dividend payment might only be a few Pounds, or even a few Pence. And dealing costs of around £10 might make it uneconomical to “reinvest” this dividend payment.
Some brokers offer a dividend reinvestment service whereby they will take dividend payments made to you and use it to purchase further shares in the dividend paying company. There may be a small fee for this service, but it will probably be much less than you would have to pay to reinvest the dividend by making a “normal” share purchase through your Broker.
As you will know, the Amateur Investor uses The Share Centre. And as you will also know I have paid for their Premium option (£2,500 + VAT per annum gets you commission free trading). This makes it possible to make very small purchases as there are no dealing fees on top.
So, back to the plot. Today I used the National Grid to make 3 purchases. Some of the dividend was used to purchase more National Grid shares. They are good dividend payers and the purchase of more shares means more dividend income next time (I hope!). My National Grid shares don’t form part of my High Yield Portfolio (HYP) as I owned them before setting up the HYP, but their dividend is why I hold them.
Second came Barclays (BARC). I have various Barclays holdings in various share accounts, and I used some of the National Grid dividend to reduce the average buying cost of one of the blocks of Barclays shares.
Finally, a small purchase of ITV (ITV) shares to reduce the average cost paid again.
So, while the shares weren’t exactly “free”, they didn’t cost me directly. Don’t you just love dividends!