Sherlock smirked.

"That is the essence of dividend investing: you don't care so much about stock prices as you are interested in the dividend payout. Also, if y ou reinvest your dividends, you experience something very akin to the magic of c ompounding interest. Let's return to our hundred shares example and set the stoc k price to 20 per share, 30 pence dividend per quarter. Unreasonably assuming no change in cost, same dividend payout, 100% reinvestment and no additional purcha ses, at the end of first quarter you'll have 101.5 shares, the 30 dividend purcha sing 1.5 additional shares yes, Harry, you can buy fractions of a share and on the s econd quarter you'll have 103.022 shares. And so on and so forth. In ten years y ou'll have 179.08 shares paying you 1581.70 annually. This is around 380 more of w hat you would've made if you didn't reinvest and you didn't have to do anything. "But of course, this is too simplistic of a model. For one thing, we're overlook ing one crucial factor: risk. All stocks carry risk. Can you tell me what it is? " Harry thought about it. Among the things Uncle Vernon liked to complain about (a nd Uncle Vernon complained about many things), besides the people at work, Harry , the council, Harry, the bank, and Harry, was how the economy was tanking. He a lso complained how Grunnings, the drill company he was the director of, wasn't d oing very well and how much work it was going to be to jump ship. "A company can go under," said Harry slowly. "Go out of business." "And when a company goes out of business, its stock loses all value," said Sherl ock, nodding at Harry in approval. "This is not quite the case, but for purposes of this illustration: a pound is a pound is a pound. As long as you keep your p ound as is, you are guaranteed to have a pound. But a company stock's price can change if you use your pound to buy stock, it can become less than a pound, more t han a pound or become zero. That is the inherent risk of all stock." Harry nodded. Suddenly dividend investment didn't sound very exciting anymore. S herlock smirked again. "But not all companies are created equal. Some are hardier than others. Take Coc a-Cola. Nestle. Visa. Master Card. Pepsi. Marks & Spenser. ITV. All those famous names even a child knows because they see them at the shops." "How can you know this without ever doing the shopping?" asked John in exasperat ion. Sherlock ignored that. "If you look through their history, you'll find these com panies are financially stable and have consistent revenue growth. Their stock al so tends to be expensive meaning investors are willing to pay premium for their st ock." "So you could stick to big reliable companies," said Harry. "Or buy venture company stock shares when they're still small and cheap," said J ohn. "But that's bit of a gamble. There's no grantee the company you're investin g in is the next Apple or Google." "Or you can opt for index funds," said Sherlock. "When it comes down to it, very few people make money picking individual stocks. Even the best of them rarely b eat average market returns. Many do significantly worse. An Index fund resolves this problem by letting you buy ownership of an entire market." Both John and Harry stared at Sherlock. Buying ownership of an entire market? Yo u could do that?

"When you buy an index fund, you're essentially buying small shares from hundred s of market-representing companies rather than larger shares of a selected few," Sherlock explained, "putting your eggs in a large grid instead of a handful of baskets, as it were. So even if you lose one slot, you still have several hundre ds of other slots making up the slack. Your index fund will do as well as the ma rket it represents, and usually includes companies that pay dividends. All of th ose companies will be paying you as long as you have shares of the index fund." "Is this why you bullied me into buying index funds with the award money I got f or clobbering the Golem?" John asked. "Yes," said Sherlock with a stern glare, "You have several virtues, John, but fi nancial savvy is not one of them."