Dividends from companies like Vocus Group Ltd (ASX: VOC) and Commonwealth Bank of Australia (ASX: CBA) are a great way to boost your income pre- or post-retirement.
In fact, while most people think of shares as an investment to grow wealth by taking advantage of rising share prices, dividends make a massive difference.
Australia's ALL ORDINARIES (INDEX: ^AXAO) (ASX: XAO) accumulation index has returned an average of 9.95% per year since 1900, according to Market Index.
Exclude dividends and the return drops to 5.7% per year. Put another way…
42% of your return comes from dividends
Now, I won't discuss the risks of buying, holding and selling shares. There are many.
However, given the high potential dividend yields on offer, it does not take a lot of money to make a real difference to your wealth, provided you are invested for the long term.
For example, Commonwealth Bank shares are currently offering a 5% fully franked dividend yield. Grossed-up for those tax-effective franking credits, it is a comparable yield of 7.14%. At that yield, $28,500 invested in Commbank shares would be enough to produce $2,000 in (after tax) passive income each year.
But, of course, it would be silly to put all your eggs in one share. Instead, you may spread it across multiple shares to lower your risk.
Last year Vocus Group, the owner of telco brands Dodo, Primus, M2 Wholesale and more; paid its shareholders a dividend equivalent to a yield of 3.9% fully franked. That is 5.5% grossed up.
If you invested 50% of your portfolio in both Vocus and Commbank you would need around $31,600 to produce a $2,000 after-tax income stream based on last year's payouts.
| Portfolio value: | $31,650.00 | |
| Portfolio income: | $2,000.28 | |
| Stock | Yield | Weighting |
| CBA | 7.14% | 50% |
| VOC | 5.50% | 50% |
For comparison, you would need $85,200 in a Commbank term deposit — currently offering just 2.35% per year — for the same after-tax return. Ugh.
| Portfolio value: | $85,200.00 | |
| Portfolio income: | $2,002.20 | |
| Stock | Yield | Weighting |
| Term Deposit | 2.35% | 100% |
Foolish Takeaway
Shares provide a superb way to generate a passive income. Indeed, while the capital gains component accounts for a larger portion of long-term investing returns, it is extremely volatile. Dividends are far more reliable, on average, and produce a great return. If you pick the right stocks, the dividends can be tax-effective and rise over time — boosting your return.
