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<\/p>\nWhen share market volatility rises, more investors would make the mistake of concentrating too much on short-term movements in share prices.<\/p>\n
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Yet investors should never overlook that share-market returns are from\u00a0both<\/em>\u00a0capital growth and dividends. Historically, dividends have made up a large proportion of the total returns from Australian shares.<\/p>\n An illustration of how much dividends can contribute to total share returns is the performance of the Australian share market since the global financial crisis (GFC).<\/p>\n Once reinvested dividends are taken into account, the performance of the Australian share market following the GFC looks much stronger \u2013 even before allowing for franking credits on dividends:<\/p>\n The S&P\/ASX 200 index (prices only) closed on March 13 this year almost 10 per cent below its pre-GFC closing high (reached in November 2007) yet 96 per cent above its GFC closing low.<\/p>\n<\/li>\n By contrast, the S&P\/ASX 200 total-return index (share prices plus reinvested dividends) closed on March 13 this year 50 per cent higher than its pre-GFC high.Critically, this total-return index is 205 per cent above its GFC low.<\/p>\n<\/li>\n<\/ul>\n Franking credits \u2013 tax credits for corporate tax already paid by companies \u2013 make a valuable contribution to returns from Australian shares that investors may sometimes overlook. A fully-franked dividend of, say, 4 per cent grosses up for franking credits to 5.71 per cent.<\/p>\n The disciplined reinvestment of dividends \u2013 if possible, given an investor\u2019s financial circumstances \u2013 magnifies their rewards. As\u00a0Smart Investor<\/em>\u00a0regularly discusses, compounding occurs as returns are earned on past returns as well as your original investment.<\/p>\n Your dividends can act as a volatility cushion. This is because dividends keep flowing from a diversified share portfolio as share prices fluctuate.<\/p>\n A way to help block out the distraction of daily movements in share prices is to remind yourself about the two sides to share-market returns, dividends and capital gains. This should assist you to remain focused on your long-term goals.<\/p>\n While recognising the contribution that dividends make to an investor\u2019s share-market returns, don\u2019t fall into the trap of abandoning a carefully-constructed, well-diversified share portfolio in the pursuit of higher dividends. Being a dividend-chaser often involves investing in higher-risk, more-concentrated share portfolios.<\/p>\n Finally, think about taking a total-return approach to investing for your overall investment portfolio. Total-return investing focuses on both the income and capital growth generated by an overall portfolio.<\/p>\n This approach should help maintain a portfolio\u2019s diversification, allow more control over the size and timing of eventual portfolio withdrawals upon retirement, and increase a portfolio\u2019s longevity.<\/p>\n Please contact us on |PHONE| if you seek further discussion on this topic<\/p>\n \u00a0<\/p>\nPost-GFC dividend rewards<\/h3>\n
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Grossed-up dividends<\/h3>\n
Compounding dividends<\/h3>\n
Dividends as a volatility cushion<\/h3>\n
Dividends and your long-term focus<\/h3>\n
Dividend-chasing trap<\/h3>\n
Total-return investing<\/h3>\n