What do you feel when you see Share Markets plunging and prices seem to be in a free-fall decline?
I’d bet you don’t feel too good.
What if I told you that the price of a shares reported each day is only a small fraction of what an investor can expect to earn from owning shares.
The unsung hero is the Dividend.
What’s a Dividend?
Divide – End.
The Dividend is a company’s profits paid to the shareholder(s) divided at the end. So if I have a share in a company, I’m entitled to a dividend and the more shares I have the more Dividend’s I’m entitled to.
One very obscure element of the financial media and financial commentators in general is their proficient skill of almost intentionally skipping over the significance of the corporate dividend. My guess is the yo-yo reporting of share prices makes for better click-bait.
Now for a long term investor, your focus should almost be entirely on the dividend and not the share price.
Why?
If you observe Australian share market returns over the last 35 years, price movements in Shares as a proportion of your investment return accounts for only 20% of your investments total return, whereas the dividend received and reinvested into the share or fund, accounts for a whopping 80% or your investment return.
Simplistically, if I had invested $1,000 thirty five years ago and reinvested my dividend during this period, my portfolio of Australian shares may be worth $10,000. Whereas if I had invested the same $1,000 and ignored the dividend and instead spent the dividend, my initial investment may be worth $2,000, which is effectively an increase in the share price only. As you can see, by ignoring the dividend, I’ve potentially cost myself $8,000, or 80% of my potential return.
If you’re a long term investor, and we all should be otherwise we are just share price speculators having a punt, the dividend is the catalyst to portfolio and share performance.
Remember it is the dividend (that’s the Golden Egg rarely reported in the media) that will drive the share price, not the other way around.
The take out message for serious investors… if you observe a company’s ability to pay and grow a dividend, I’m certain the share price will follow.
For more information or advice on your investment returns, give the team at Steve May a call and start a conversation 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.
