Two hypothetical ASX investors meet in a café and get talking. After establishing that both are interested in the markets and ASX shares, the next question that is likely to be posed might go something like this: ‘are you a growth investor or a dividend investor?’.
Whilst this isn’t a binary choice (there are many types of investing styles and one can pursue more than a single strategy), you’ll find that most investors will have more of a foot in one camp than the other.
Myself? I identify as more of a dividend investor. Whilst I do own shares that don’t pay dividends, most of the shares that I both own and am watching do pay dividends.
This isn’t by accident. I believe dividends are a great metric to measure the potential success of a company and also form a vital component of the long-term returns you can expect from a portfolio.
The advantages of ASX dividend shares
To illustrate – let’s take a typical ASX index fund like the SPDR S&P/ASX 200 Fund (ASX: STW). This fund represents the performance of the 200 largest ASX companies, as measured by the S&P/ASX 200 Index (INDEXASX: XJO). Since 2001, STW has returned an average of 8.35% per annum. Of that 8.35%, a substantial 4.7% comes from dividend income alone, with the remaining 3.65% stemming from capital growth.
But that’s a very vague (if not informative) statistic, so let’s look at some real advantages of dividend-paying companies.
Whenever a dividend is paid, it actually weakens the company that pays it – think of it like a business giving its profits away. Therefore, in order to be able to afford consistent dividend payments, a company must be fundamentally strong.
If we look at a dividend payer like Washington H. Soul Pattinson and Co. Ltd (ASX: SOL), we can see that it has paid a dividend every year since 1903 – and has raised this dividend every year since 2000 (even through the GFC). That indicates to me that the foundations of ‘Soul Patts’ are extremely strong, and the company is a prime candidate for a long-term investment.
Dividend payments also help immensely in the event of a stock market crash. Although some companies might cut their payouts during a severe recession, most will still be paying their shareholders in good times and bad. That means your portfolio will have a cushion against capital losses.
Of course, dividend investing is not an easy path to take – there are a lot of traps to watch out for and tricks to finding good long-term investments. But it’s a path that I find rewarding and lucrative.
The post Why I choose ASX dividend shares over ASX growth shares appeared first on Motley Fool Australia.
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Motley Fool contributor Sebastian Bowen owns shares of Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia owns shares of and has recommended Washington H. Soul Pattinson and Company Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. 2020