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Dividends: The great wealth creator

The Motley Fool discusses the importance of dividends to long term returns.

There is way too much noise in the market about share prices.

According to a study of U.S. share prices over 100 years referred to by John Bogle of the Vanguard Group, the average return for shares during this 100 year period is 9.6% per annum. The humble little dividend contributed about 4.7% to these returns.

The silent achiever

So, despite daily hoo-hahs about share prices and whether the All Ords is up or down, capital appreciation makes up just a little over 50% of the money you can expect to make from shares in the long term. The other 50% of wealth generation comes from an ignored silent achiever – dividends.

Bear in mind these are average figures. You can achieve these figures by buying an index tracking fund. The Motley Fool believes that you can achieve much better results by focussing on good businesses and buying them at sensible prices. Good businesses have this habit of increasing profits and paying increasing dividends, and our lives are usually better off by that fact.

Assuming that an investor has no special insights into any one company or industry in particular, other than an ability to distinguish good businesses from bad businesses, a sensibly diversified portfolio throwing back a good stream of dividends is not a bad strategy.

The quality high yielders

Australia’s largest bank Commonwealth Bank of Australia (ASX: CBA) is now trading on a grossed up yield of 10.6% based on last year’s dividend. CBA has a fortress of a balance sheet, and is not afflicted by ambitious overseas forays infecting the likes of Australia and New Zealand Banking Group (ASX: ANZ) and National Australia Bank (ASX: NAB). Its size allows for significant economies of scale, which will play a very crucial part in the long term. The Motley Fool has no quarrels if a company decides to make all its money in Australia and return the money to shareholders, year in year out.

QBE Insurance Group Ltd. (ASX: QBE) is now trading on a grossed up yield of 10.9% based on last year’s dividend.  The management team has hardly put a foot wrong in over a decade of operations.

Telstra Corporation Limited (ASX: TLS) is now trading on a grossed up yield of 13%. Readers can find plenty of commentary on this stock, including why Dean Morel calls it his favourite ASX 20 share pick.

As pointed out by my colleague, Scott Phillips, Westfield Group (ASX: WDC) is trading at a yield of 7.4%.

Funds manager Platinum Asset Management (ASX: PTM) trades at a grossed up yield of 10%. The full talents and experience of the management team is available to a retail investor without paying hedge fund prices and lock-in periods.

The Foolish bottom line

A portfolio of these 5 shares provides a trailing grossed up dividend yield of 10.4% per annum.  This is better than money at the bank, and certainly above the cost of funding a line of credit at 7% per annum.

More importantly, this portfolio allows you to sleep soundly at night, because if you are comforted with a 10% grossed up dividend return, you will not really fret if the share prices go down.

In fact, the share prices in this portfolio do not really need to do much at all over future years to make a decent return.  There is a risk of falling dividends, of course, but even if earnings fall by half and dividends fall by half, you are still getting just a tad below bank deposit rates.

With markets down, now might be a great time to consider this one large company we think has some serious long-term potential. Get this free special report from the Motley Fool – The Best Stock For $100 Oil. Click here to sign up for free, now.

More reading:

The ultimate high yield dividend portfolio

Fool contributor Peter Phan owns shares in QBE, his last purchase being in August 2011. The Motley Fool’s disclosure policy is a good sleep is underrated. This article has been authorised by Bruce Jackson.

 

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