Around the world, many companies are announcing earnings results right now, and the aggregate trend is up from a year ago.
Improved global business conditions have translated into higher revenues and net profits for the majority of listed companies, and a significant increase in cash holdings.
In Australia, for example, more than half of the top 200 companies on the Australian Securities Exchange have reported their results from the financial year to 30 June 2021. The remainder will report over the coming weeks.
Around 75 per cent of those that have reported have announced higher revenues and profits, and many are rewarding their investors with bigger cash returns.
As well as declaring higher share dividends, some companies have also announced they'll be paying a "special dividend" to return excess cash to shareholders.
In fact, Australian company shareholders and investors in managed funds and exchange traded funds (ETFs) that hold shares are broadly on track to receive record income payouts from the last financial year.
The previous Australian record was set in 2019 when more than $27 billion in aggregate share dividends were paid out to investors. That aggregate figure is set to easily top $30 billion for the 2020-21 financial year.
Globally, there are estimates that company dividend payouts to investors could also break previous record levels set before the COVID-19 pandemic and reach close to $2 trillion.
It's a stark turnaround from this time last year when payouts to investors slumped as many companies chose to stockpile their cash rather than spend it.
This was largely in response to the spread of COVID-19 as companies opted to bulk up their cash reserves to offset the impact of lower revenues caused by the pandemic.
A decision for investors
Now, many companies are eager to reduce the amount of cash held on their balance sheet.
Investors with exposures to Australian companies can expect distributions to start flowing from October as dividend payments from 2020-21 are made.
Managed funds and ETFs will also receive company dividend payments, which will then be aggregated and paid out as distributions to unitholders over time.
As always, the decision is whether to keep those dividends or distributions, or to reinvest those payouts back into the market.
For many investors, especially people in pension phase reliant on regular income streams, company dividends and fund distributions are an important element of cash flow to pay for everyday living costs.
Investors in pre-retirement (accumulation) phase may not need additional cash income. It all comes down to one's personal income needs.
But there's compelling evidence that reinvesting company distributions will produce significantly higher investment returns over the longer term.
The case for reinvesting
The recently released 2021 Vanguard Index Chart provides good context around the advantages of reinvesting income distributions over time.
Mapped over a 30-year period from 30 June 1991, the chart shows the performance of six different asset types – Australian shares, United States shares, international shares, Australian bonds, listed property, and cash.
The chart also shows how much a starting investment of $10,000 back in mid-1991 would have been worth at the end of June this year.
The total numbers assume all the income received from distributions along the way was reinvested back into the same asset, and they don't include any buying costs or taxes. Also worth noting that past performance is not an indication of future performance.
What's very clear is that the returns from higher-risk assets such as shares have been consistently stronger over the last 30 years than lower-risk assets such as fixed income and cash.
Anyone who invested $10,000 across the whole Australian share market three decades ago would have achieved a total return per annum of 9.7 per cent, assuming all distributions had been reinvested.
By 30 June 2021 their initial investment, combined with distributions, would have compounded to $160,498.
Alternatively, a $10,000 investment into the U.S. share market in June 1991 would have grown to $217,642 by 30 June 2021 if all income received had been reinvested back into U.S. shares.
That's based on the 10.8 per cent average annual return from the broad U.S. market over 30 years.
Investing $10,000 in cash over 30 years would have achieved a total return per annum of 4.6 per cent and grown to $38,938.
The moral here is that reinvesting distributions over time, regardless of the asset class, will achieve long-term compound growth.
Taking distributions such as share dividends in cash will invariably erode the benefits of those compounding returns, especially over the longer term.
Easy ways to reinvest
Reinvesting company dividends or distributions from shares, managed funds or ETFs is relatively easy.
In respect to company dividends, many listed companies offer dividend reinvestment plans (DRPs) that allow investors to have the cash value of their distributions converted into additional shares.
This conversion is generally done at the market price on the day the company pays out its dividend.
DRPs can usually be selected through the share registry company that's used by the listed company to manage its customer records, including changes in share ownership and dividend payments.
The advantages of selecting a DRP option are that there are no additional brokerage fees involved when shares are added to an existing shareholding, and the overall process is automatic.
Likewise, managed funds and ETFs usually provide reinvestment options either as an automatic or opt-in investment feature.
Where automatic reinvestment plans are not available, fund investors can readily redirect cash received from distributions straight back into their investments by purchasing additional shares or units.
Either way, choosing to reinvest distributions is a proven strategy for building long-term wealth.
This article is general in nature and not intended as financial advice.