Dividends power long term returns

Over the last 12 months, the Australian sharemarket has dropped about 7.5%. It’s not a great result, and no one enjoys watching the value of their shares head south. However, market ups and downs – or ‘volatility’, go hand in hand with sharemarket investing.

Right now, companies are facing a variety of challenges from rising inflation and higher interest rates through to tight labour markets and ongoing supply chain issues arising from COVID. It will take time for these challenges to be sorted. But history shows that sharemarkets never fail to recover from previous lows, and there’s no reason to believe that won’t be the case this time around.

This is why shares are generally regarded as a long term investment – the best gains can often be made over periods of five, seven or ten years, when market highs and lows are smoothed out.

Part of the appeal of equities is that investors benefit from more than a rise in share values. Dividends can be a source of ongoing income, and it’s nice to receive a juicy dividend cheque even when the value of your shares has dropped.   

At times like the present when the market is volatile, it can be easy to doubt the ability of shares to deliver decent long term returns. But consider this. Our leading stock market index – the ASX 200, shows share values have climbed 21% over the past 5 years. That works out to an average annual again of about 4%.

It’s not a bad result. But the ASX 200 Accumulation Index, which includes the value of dividends earned on shares, has risen 47% over the same period. On a yearly basis it means total returns – capital growth plus dividends, have averaged over 8%.

That’s a far better return. Even more appealing, dividend income can be lightly taxed – that’s because the Tax Office gives shareholders credit for tax paid on company profits.

With share values currently down at present, investors can have an opportunity to buy quality shares for less than they were trading for several months ago. I can’t guarantee the market won’t fall further, but as a long term investor it’s a chance to stock up and position your portfolio for both dividends and potential capital growth over time.

The InvestSMART Professionally Managed Accounts have a number of ways investors can take their dividends. Click here to view our full help centre on dividends and our accounts.

Paul Clitheroe is Chairman of InvestSMART, Chair of the Ecstra Foundation and chief commentator for Money Magazine.