The key is to reinvest income

If you combine a high dividend with a low annual charge, you can generate steady returns year after year, offsetting stock market volatility.

The key is to reinvest dividends back into your portfolio for growth, rather than banking the income. This way you buy more stock, which generates more dividends, which buys more stock, and so on. Over lengthy periods this compounding effect can double your returns, according to new research from Fidelity.

If you had invested £100 (Dh491) a month in the UK’s FTSE All Share Index over the past 10 years and reinvested all of your dividends, your portfolio would be worth £19,382. However, if you had taken the dividends as income you would have just £15,837, around £3,500 less.

Dividend investing really proves its worth over longer periods. After 30 years your portfolio would be worth £140,585 with dividends invested, twice as much as the £70,923 you would have if you had withdrawn and spent the dividends.

Fidelity investment director Tom Stevenson said the earlier you start, the better. “For compounding to supercharge your returns it requires two simple ingredients: time and the regular reinvestment of returns.”

You also have to take into account charges. An apparently insignificant difference in annual recurring investment fund charges can make a massive different over time. So an investment fund with a total expense ratio (TER) of 1.75 per cent a year can ultimately cost you thousands of dollars more than one that one that only charges 0.07 per cent, so always look carefully at the annual management fee or TER. The higher-charging fund must deliver hefty outperformance to justify its extra cost.

Say you invested $50,000 in two funds with these different charging structures. If both grew at exactly the same rate of 5 per cent a year, the higher-charging fund would give you $130,518 after 30 years, the cheaper fund a whopping $211,816.

That is a difference of $81,298 purely due to that apparently small difference in annual charges.