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Why I think it’s easier to focus on profit and dividends compared to capital growth

Tristan Harrison
dividends

I believe it’s easier to focus on the dividend return than capital return of investments.

A dividend is funded by the earnings of the business and is linked to the trajectory of the business as to whether it goes up and down over time. Whereas growth of the share price is entirely dependent on what investors are willing to pay on the day, although the share price should go up over time if earnings rise.

Investors who look at the profit and cashflow of the business, and how they might receive their share of the profit, are true investors. People who don’t think about the earnings of the business and are just thinking about what the share price might do in the short-term are speculators. I believe there’s a big difference, you don’t want to be a speculator.

The share prices of REA Group Limited (ASX: REA), Altium Limited (ASX: ALU), Ramsay Health Care Limited (ASX: RHC) and others can easily see their share price fall by more than 10% in a month. But the dividend goes up year after year because the underlying profit supports it. The share price should eventually follow. 

We can’t control what multiple of earnings investors are willing to pay. A price/earnings ratio can easily swing from 30 to 33, or go from 30 to 27 in a short space of time, which could dramatically change how much of a gain your investment shows since you bought it.

Seeing the increase of the dividend year after year could give you much more confidence to stay invested whereas focusing on the share price could see you hover over the sell button every time there’s a big movement.

As Benjamin Graham said, in the short run the market is like a voting machine, which tell us which businesses are popular and unpopular. But in the long run, the market is like a weighing machine where performance will determine which direction the share price goes.

Foolish takeaway

Share prices may become more volatile in the latter stages of 2019, but as long as you focus on the fundamentals of the businesses that you’re invested in then you should do just fine. And enjoy the payments of dividends every three or six months. 

That’s why I feel very confident holding steadily growing businesses like these in my portfolio.

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Motley Fool contributor Tristan Harrison owns shares of Altium. The Motley Fool Australia owns shares of Altium. The Motley Fool Australia has recommended Ramsay Health Care Limited and REA Group 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. 2019