Don't get me wrong.
I love dividends as much as the next investor.
For retirees especially, dividends can provide a meaningful addition to household income.
But what if you're not retired?
What if you're younger than retirement age, but aspire to create enough wealth for you and your family to live independently and with dignity when you're older?
The establishment of a self-managed superannuation fund (SMSF) is a key plank in many people's retirement strategy these days and, undoubtedly, many of you reading this have already gone down that path.
As you know, many shares on the ASX come with franking credits, which help to lower your SMSF's overall tax bill. For members in the accumulation phase of super, franked dividends are taxed at 15% but come with a 30% franking credit.
But these dividends can't be accessed as cash by the SMSF's member/s and have to be reinvested into existing or new ideas.
That's not a bad thing, but there's another tax-efficient way of investing that perfectly parallels a dividend strategy with an SMSF.
Go for growth
Dividends have their place within an SMSF, especially given the generous tax treatment of fully-franked dividend-paying shares.
But so does a growth component in any portfolio, especially in an environment where superannuation legislation dictates you can't touch your super until at least retirement (and under a few other restricted conditions as well).
If you're 40 and can't access your super until at least 60, then that's at least 20 years in which you have a golden opportunity to buy shares in companies that have the ability to add significant capital gains.
The strategy should be to buy quality businesses that have a history of delivering for shareholders allowing you to hold the shares and postpone that capital gains tax event for as long as possible.
In that vein, here are 10 of my favourite ideas for SMSF trustees that I believe can genuinely be held for 10 years plus and provide market-beating returns for your SMSF.
| Company | Recent price ($) | Trailing dividend yield (%) | Return on equity % | Description |
| Pro Medicus Limited (ASX: PME) | 5.11 | 0.5 | 29.2 | Integrated software for the health industry. |
| Nanosonics Ltd. (ASX: NAN) | 2.29 | 0.0 | 41.1 | Infection control and decontamination products. |
| Hansen Technologies Limited (ASX: HSN) | 3.75 | 1.8 | 19.7 | Billing software solutions. |
| ARB Corporation Limited (ASX: ARB) | 15.07 | 2.1 | 19.1 | SUV/4WD accessories |
| Carsales.Com Ltd (ASX: CAR) | 12.49 | 3.0 | 44.1 | Online automotive sales. |
| Cochlear Limited (ASX: COH) | 141.56 | 1.7 | 45.7 | Implantable hearing technology. |
| InvoCare Limited (ASX: IVC) | 13.83 | 3.0 | 32.5 | Funeral and cemetery services. |
| Corporate Travel Management Ltd (ASX: CTD) | 22.74 | 1.1 | 18.3 | Business travel management solutions. |
| CSL Limited (ASX: CSL) | 127.67 | 1.3 | 46.2 | Global specialty biotherapeutics company. |
| REA Group Limited (ASX: REA) | 68.89 | 1.2 | 33.5 | Online residential sales |
** All stocks are fully franked except for CSL Limited and Pro Medicus Limited
For the record, I own five of the ideas above and plan to continue holding these shares for as long as I possibly can.
The common denominator here is that all of these companies are providing good to high returns on shareholders' capital (ROE) and, over the long-run, I expect these high ROEs — if they can be maintained — to be reflected in significantly higher share prices than today's.
Foolish takeaway
I don't believe SMSF trustees need to only invest for growth, or only for yield.
Do both and build your portfolio with regular employer and personal contributions over time. The tax advantages in doing so will help you get to a level of financial independence I hope you're genuinely satisfied with.
Stock selection is critical though, and I'd focus on quality, even if some of today's prices look a little pricey.
For this reason, please read the report below and take heed of some of the companies you definitely need to avoid if you're going to have any chance of building a market-beating portfolio.
