ASX investors should be like wide-eyed children on Christmas Day when the dividend payments roll in this month. Dividends on average were higher for the first half than a year before.
The S&P/ASX 200 Index (ASX: XJO) (Index: ^AXJO) over the past year is up 8.84%, which is close to the index’s long-term average gain. Yet what would the rate of return be if you included reinvested dividends?
For that, you can use the S&P/ASX 200 Accumulation Index, also known as the S&P/ASX 200 Net Total Return Index (ASX: XNT) (Index: ^AXNT). This shows the accumulated index gain plus the extra return generated from reinvesting all dividends.
Some investors may be focused entirely on chasing share price gains, but don’t pay as much mind to the long-term profit potential of dividend income. For example, if you owned 1,000 shares of Insurance Australia Group Ltd (ASX: IAG), you’d get $0.13 in interim dividends for each share, or $130. That’s great to get, but it won’t make you rich.
Or will it?
If you reinvested that money back into IAG stock consistently over many years, owning those shares, as well as a number of other dividend-paying stocks could create wealth for you.
Take a look at the gain of ASX 200 Total Return Index compared to the ASX 200 Index.
Over the past four years, the ASX 200 Index has risen about 25%, yet the Total Return Index climbed about 48%. The wide gap is from the growth in dividends of the ASX 200 companies and the extra gains from reinvesting those dividends.
ASX 200 Index vs ASX 200 Total Return Index 4-year chart
Source: Google Finance
That’s why Foolish investors reinvest as much of their received dividends as possible back into more shares. The power of compounding returns is the secret behind building long-term wealth.
Here are the total shareholder returns (TSR) of several other ASX 200 stocks.
|5-year TSR||10-year TSR|
|Commonwealth Bank of Australia (ASX: CBA)||15.90%||16%|
|SEEK Limited (ASX: SEK)||17.50%||24.40%|
|CSL Limited (ASX: CSL)||26.70%||27%|
|TPG Telecom Ltd (ASX: TPM)||35.90%||23.60%|
Don’t fret over missing out on these gains. All four of these stocks are still attractive choices for future returns as well. CBA will be in business for a long time, paying dividends along the way. SEEK, CSL and TPG Telecom are solid growth stocks with double-digit earnings growth forecast over the next several years.
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Returns As of 6th October 2020
Motley Fool contributor Darryl Daté-Shappard does not own shares in any company 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 Bruce Jackson.
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