Income your way: Distributions for compounding wealth and living life

I hope Mr. Rockerfeller was able to find other joys in his life. Perhaps he should have spent less on material items and more on experiences? Researchers at the University of Texas found that people derive more pleasure when they spend money on experiences rather than material goods. I hope Rockefeller used his dividends for a weekend getaway or two with friends.

Still, we understand the sentiment and our InvestSMART Diversified Professionally Managed Account (PMAs) clients experience the joy of receiving their distributions four times a year. Our PMAs invest in exchange traded funds (ETFs) which pay distributions quarterly.

Below is a look at the last 12 months' dividend yield for our core diversified portfolios:

How do you like your distributions?

The InvestSMART PMAs receive these distributions as cash and investors have a choice of what happens next. For investors wishing to use the income for living expenses or use elsewhere they use the PMAs Income Sweep feature. With this turned on, any income is bundled up and transferred out to your bank account the following month.

Investors using the income for their living expenses can also turn on a regular withdrawal plan, which takes a preset amount from the portfolio per month and transfers it out to your bank account.

For those looking to grow their wealth, they leave the income sweep turned off and receive the distributions as cash. The cash will then be used to buy more holdings. This will rebalance the portfolio. As the dividends increase, the cash percentage of the portfolio increases, while the other holdings will be underweight. The cash will then be used to bring the most underweight holdings back in line with the model.

Investing for total return

The distributions paid out by ETFs are made up of dividends paid by the underlying holdings and any realised capital gains created when the ETF issuer rebalances. This means ETFs can help investors to focus on a total return approach of investing and not fixate on dividends at the cost of capital growth.

To see the breakdown of income and capital growth from our portfolios, visit the portfolio page e.g. InvestSMART Balanced here, scroll down to the performance section, and you'll see a table.

Investors looking for growth don’t discount the power of compounding distributions. You can go the extra mile by also using a regular contribution plan to automatically add to your portfolio and let time and the power of compounding be your friend.

For those enjoying the spoils of their distributions, we hope you’re putting them to your next family holiday, a movie with a friend or a bus ticket down to the waterfront with a book on the next warm day. Just yesterday, I took my seven-month-old boy for a walk, sat down at a table at a bar on Lygon Street and I had a beer in the sun as he smiled and practiced his new sounds. Distributions well spent.

If you have any questions, please feel free to pop them in the comments or use the chat in the bottom right corner - it’s run by real people, myself included.