Why it’s better to go for ASX growth shares over dividends to become rich

I believe that it’s better to invest in ASX shares offering growth rather than dividends to become rich.

Firstly, I want to state that I’m glad most ASX shares pay a dividend for investors. It’s good to reward shareholders, dividends are very useful in Australia – particularly with franking credits to reduce a tax liability.

However, generally, higher dividends may lead to lower returns over time compared to growth shares.

Businesses like REA Group Limited (ASX: REA) earn very good returns on money invested in the business. Therefore, retaining money to re-invest in at high rates will compound very strongly over time.

A business that simply keeps more profits and compounds it will become a become bigger business, therefore creating more capital growth for shareholders.

However, another key reason for my belief is down to tax. The more dividends you receive along the way the more tax you’ll pay and therefore there will be less net returns for your portfolio.

Of course, tax is a good thing. It’s the cost of maintaining the great society that we live in. But, you don’t want to set yourself up for a road of higher taxes than necessary.

There are some shares that have high dividend yields that can generate high total returns and are worth investing in like WAM Research Limited (ASX: WAX).

However, shares offering lower total returns, that are nearly all from dividends, may not be as good as an investment choice. Shares like Commonwealth Bank of Australia (ASX: CBA) and Westpac Banking Corp (ASX: WBC) are two of the stocks that I’m thinking of.

Franking credit refunds being reduced by Labor would make the overall comparison even more compelling for growth shares.

Foolish takeaway

However, dividend shares should remain attractive to investors who want a high level of income today, not in five years.

The tax and re-investing for growth are two main reasons why I’m attracted to growth shares like Costa Group Holdings Ltd (ASX: CGC) and MNF Group Ltd (ASX: MNF) which are also growing their own dividend payments at a fast pace.

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Motley Fool contributor Tristan Harrison owns shares of COSTA GRP FPO. The Motley Fool Australia owns shares of and has recommended COSTA GRP FPO and MNF Group Limited. The Motley Fool Australia has recommended REA Group 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 Scott Phillips.

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