In an earlier video I addressed the compounding benefits of dividends when added to your overall investment return. If reinvested, Dividends returned roughly 80% of the investment over the 35-year period, whereas the stock price movements contributed to 20%. I also highlighted the fact that this information is rarely reported on the 6pm news, but when have the ‘facts’ ever gotten in the way of a sensational news story!
Now if we focus on Dividends, we need to understand why they’ve added such a boost to our returns and more importantly how to take advantage of it.
In effect, the long-term performance of the stock market reflects the performance of the underlying businesses that make up the stock market. Companies are judged on their ability to make an income, sustain this income and grow the income. These companies will often distribute a portion of their dividends via a payment to the underlying shareholders, or alternately retain a portion of the profits that are then reinvested back into the company, most often it’s a combination of both. Now, if we’re in a position where we do not require the dividends i.e. still working and accumulating wealth, we can then repurchase additional stock or units in the businesses that have paid us the dividends, accelerating our wealth creation. Now the impact of Dividends may initially seem lacklustre, but over a working life the magic of compound interest works wonders on our portfolio. What’s better is the longer you hold and reinvest into a portfolio of Dividend paying stocks or managed fund units, the less ‘risky’ the portfolio becomes. So not only have you built wealth, you’ve also reduced risk, what a great combo!
Now the kicker here is the returns highlighted in this article and my video are not a result of genius ‘investment managers’ or high flying ‘fund manager’ stock picks, but rather the result of market returns achieved via ‘boring’ broad based index stock market funds. These are effectively buy and hold strategies requiring minimal ‘professional help’ whilst charging very competitive fees. The result? You as the investor should achieve market performance less the fee charged by the manager. This is an investment strategy and style we stand by.
35 years may sound like a long time, but reality is 35 years is roughly 1 working life, so what are you waiting for?
For those interest I’ve included a link to more information on Dividends here.
If you’d like further help on growing your investment portfolio, start a conversation with us today.
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Nick Shanley, Steve May, Luke Styles and Shanley Financial Planning T/A Steve May Financial Services are Authorised Representatives / Corporate Authorised Representative of Sensibly Pty Ltd, AFSL 533923. Please refer to our website at www.stevemayfs.com.au to reference our Financial Services Guides.
