Boosting your wealth on the share market is often seen as the domain of Gordon Gekko/Wolf of Wall Street-types, but the reality is most of us can quite easily make a decent return with shares. The secret is to invest for the long term.
Even a simple market-tracking exchange traded fund (ETF) like the SPDR S&P/ASX 200 Fund (ASX: STW) has returned 8.18% per year on average since 2001 – that’s a lot better than a term deposit at current rates!
But there’s one element that is often vastly understated when looking at your investing returns. And that’s the percentage of your return that is made up of dividends.
How do dividends work?
Dividends are cash payments that some companies make to their shareholders on a periodic basis (usually twice a year in Australia).
Dividends are often thought of as a ‘perk’ of owning shares (or maybe as the only reason to own shares if you’re retired). But, if you actually break down that 8.18% yearly return from STW mentioned above, only 3.46% is from capital growth – that is, the share price going up. The remaining 4.72% has come from the dividends that STW has paid out every 6 months since 2001 – that’s more than half of your return from dividends.
In Australia, our tax system encourages companies to pay dividends, hence why an index of Australian companies like STW has such a large portion of returns coming from dividends.
Using ASX dividend shares to boost income and wealth
Not only can dividend-paying shares mean larger returns on your investments, dividend payments are as passive an income as you can get. They will flow into your bank account no matter if you’re working or sick, young or old, rich or poor. This means that whatever stock prices are doing, you’re always getting some kind of return (in the form of cash) from your dividends.
Something else to note is that most individual companies aim to increase their dividends every year! So not only can you lock in a stream of passive income when you buy a dividend-paying share (if all goes well for the company), you might also get a pay rise every year as well.
So if you really want to boost your wealth, take your cash out of that impotent savings account, and start shopping for some real return in the stock market!
The post How to boost your wealth with ASX dividend shares appeared first on Motley Fool Australia.
I would humbly suggest starting with these three!
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Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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