The Motley Fool

Why I think it’s easier to focus on profit and dividends compared to capital growth

I believe it’s easier to focus on the dividend return than capital return of investments.

A dividend is funded by the earnings of the business and is linked to the trajectory of the business as to whether it goes up and down over time. Whereas growth of the share price is entirely dependent on what investors are willing to pay on the day, although the share price should go up over time if earnings rise.

Investors who look at the profit and cashflow of the business, and how they might receive their share of the profit, are true investors. People who don’t think about the earnings of the business and are just thinking about what the share price might do in the short-term are speculators. I believe there’s a big difference, you don’t want to be a speculator.

The share prices of REA Group Limited (ASX: REA), Altium Limited (ASX: ALU), Ramsay Health Care Limited (ASX: RHC) and others can easily see their share price fall by more than 10% in a month. But the dividend goes up year after year because the underlying profit supports it. The share price should eventually follow. 

We can’t control what multiple of earnings investors are willing to pay. A price/earnings ratio can easily swing from 30 to 33, or go from 30 to 27 in a short space of time, which could dramatically change how much of a gain your investment shows since you bought it.

Seeing the increase of the dividend year after year could give you much more confidence to stay invested whereas focusing on the share price could see you hover over the sell button every time there’s a big movement.

As Benjamin Graham said, in the short run the market is like a voting machine, which tell us which businesses are popular and unpopular. But in the long run, the market is like a weighing machine where performance will determine which direction the share price goes.

Foolish takeaway

Share prices may become more volatile in the latter stages of 2019, but as long as you focus on the fundamentals of the businesses that you’re invested in then you should do just fine. And enjoy the payments of dividends every three or six months. 

That’s why I feel very confident holding steadily growing businesses like these in my portfolio.

Best 3 ASX Dividend Ideas For 2020

With interest rates likely to stay at rock bottom for months (or YEARS) to come, income-minded investors have nowhere to turn... except dividend shares. That’s why The Motley Fool’s top analysts have just prepared a brand-new report, laying out their top 3 dividend bets for 2019.

Hint: These are 3 shares you’ve probably never come across before.

They’re not the banks. Not Woolies or Wesfarmers or any of the “usual suspects.”

We think these 3 shares offer solid growth prospects over the next 12 months. Each of these three companies boasts fully franked yields and could be a great fit for your diversified portfolio. You’ll discover all three names and codes in "The Motley Fool’s Top 3 Dividend Shares for 2019."

Even better, your copy is free when you click the link below. Fair warning: This report is brand new and may not be available forever. Click the link below to be among the first investors to get access to this timely, important new research!

The names of these top 3 dividend bets are all included. But you will have to hurry. Depending on demand – and how quickly the share prices of these companies move – we may be forced to remove this report.

Click here to claim your free copy right now!

Motley Fool contributor Tristan Harrison owns shares of Altium. The Motley Fool Australia owns shares of Altium. The Motley Fool Australia has recommended Ramsay Health Care Limited and 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.

FREE REPORT: Five Cheap and Good Stocks to Buy now…

Our Motley Fool experts have FREE report, detailing 5 dirt cheap shares that you can buy today.

One stock is an Australian internet darling with a rock solid reputation and an exciting new business line that promises years (or even decades) of growth… while trading at an ultra-low price…

Another is a diversified conglomerate trading near a 52-week low all while offering a 2.7% fully franked yield…

Plus 3 more cheap bets that could position you to profit over the next 12 months!

See for yourself now. Simply click the link below to scoop up your FREE copy and discover all 5 shares. But you will want to hurry – this free report is available for a brief time only.