I love Christmas. In Australia we’re lucky to have great weather, relaxing time with family, perhaps a few too many beers, and let’s not forget the best bit; presents. Now, I’m not saying I’m ungrateful for the replica 18th century gas lamp from grandma, but I prefer presents that have a little more use in my everyday life, like a great book to grow my knowledge or perhaps some money to invest in terrific companies.
Consider this though; there’s a way that investors can make Christmas come twice each year, every year, almost without fail. This method has been used by investors for years and years and has been shown to grow wealth exponentially over time. The strategy remained strong through the dotcom crash in the early 2000s, and the GFC in 2008-9.
So what is this magical method? How can investors receive an income twice per year or grow their investment in a company by doing absolutely nothing?
Many will already know where I’m going with this, but described above is the magic of dividends. Specifically, I’m talking about the dividends from some of Australia’s biggest and most reliable companies.
Dividends are paid twice yearly by many Australian companies and can either be taken as cash or reinvested in the company through dividend reinvestment plans (DRP). DRPs allow investors to sit back and watch their holding grow each year as the company will give you more shares in the company if you forgo a cash payout.
So what are the best companies for this strategy? I believe any of our big four banks, but specifically Australia and New Zealand Banking Group (ASX: ANZ) and National Australia Bank Ltd (ASX: NAB) are delivering the best combination of a great, growing dividend payout, and long-term outlook.
These two banks have a long history of great shareholder returns and the outlook for both is just as strong, if not stronger, than in the past. ANZ’s exposure to Asia is a key differentiator to peers, while NAB is expected to retreat from its poor UK investment which should boost shareholder returns in years to come. They’re both paying a fully franked dividend yield of around 5.5% currently, which if reinvested each year in the company will result in a 70% gain over 10 years, without any share price appreciation at all!
The power of compounding cannot be underestimated over the long term. Investing in companies like NAB and ANZ and reinvesting your twice-yearly dividend payments can deliver great returns over the medium to long term. For example, investors in Commonwealth Bank of Australia (ASX: CBA) who bought back in 2004 at around $30 have received over $26 in dividends and $45 in capital growth per share.
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Motley Fool contributor Andrew Mudie does not own shares in any companies mentioned