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Are traditional dividend shares going the way of the dinosaurs?

A common thought on the share market is that it’s split into ‘growth’ shares and ‘income’ shares. However, shares that aren’t growing are in danger of being left behind by newer businesses looking to steal their market share.

Some of the most highly held businesses on the ASX like Commonwealth Bank of Australia (ASX: CBA), Wesfarmers Ltd (ASX: WES) and Telstra Corporation Ltd (ASX: TLS) are known for their impressive market positions.

However, this market position just puts large targets on those businesses’ backs.

Good ‘dividend’ shares are often ones that are mature companies and aren’t likely to grow much faster than the overall Australian economy. These shares pay out a large portion of their earnings as a dividend each year, they don’t have much need for re-investing those profits.

The problem for these mature businesses is that change is occurring at a faster and faster rate. Technology and software companies are expanding their digital reach into other areas beyond their initial expertise.

There’s not much point having a big dividend yield if the value of the company and its earnings are going to steadily decline. Eventually the dividend becomes unstainable and it has to be reduced, which happened with Telstra recently.

‘Fintech’ shares are chipping away at the big bank earnings power. Aldi, Costco and soon others will try to steal market share from Woolworths Limited (ASX: WOW) and Wesfarmers’ Coles. The old faithful dividend stocks may not be that good in the future.

Foolish takeaway

I believe that investors need to focus their investing efforts on businesses that are genuinely growing faster than the average blue chip. Shares like REA Group Limited (ASX: REA), Ramsay Health Care Limited (ASX: RHC) and Altium Limited (ASX: ALU) are the future blue chips and I believe that these are the types of businesses that investors should focus on.

Investors who are after shares with bigger dividends should look at listed investment companies like WAM Capital Limited (ASX: WAM) or real estate investment trusts with decent yields like Folkestone Education Trust (ASX: FET).

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Motley Fool contributor Tristan Harrison owns shares of Altium, Ramsay Health Care Limited, and WAM Capital Limited. The Motley Fool Australia owns shares of Altium, Telstra Limited, and Wesfarmers Limited. 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.