Boosting your wealth on the share market is often seen as the domain of Gordon Gekko/Wolf of Wall Street-types, but the reality is most of us can quite easily make a decent return with shares. The secret is to invest for the long term.
Even a simple market-tracking exchange traded fund (ETF) like the SPDR S&P/ASX 200 Fund (ASX: STW) has returned 8.18% per year on average since 2001 – that's a lot better than a term deposit at current rates!
But there's one element that is often vastly understated when looking at your investing returns. And that's the percentage of your return that is made up of dividends.
How do dividends work?
Dividends are cash payments that some companies make to their shareholders on a periodic basis (usually twice a year in Australia).
Dividends are often thought of as a 'perk' of owning shares (or maybe as the only reason to own shares if you're retired). But, if you actually break down that 8.18% yearly return from STW mentioned above, only 3.46% is from capital growth – that is, the share price going up. The remaining 4.72% has come from the dividends that STW has paid out every 6 months since 2001 – that's more than half of your return from dividends.
In Australia, our tax system encourages companies to pay dividends, hence why an index of Australian companies like STW has such a large portion of returns coming from dividends.
Using ASX dividend shares to boost income and wealth
Not only can dividend-paying shares mean larger returns on your investments, dividend payments are as passive an income as you can get. They will flow into your bank account no matter if you're working or sick, young or old, rich or poor. This means that whatever stock prices are doing, you're always getting some kind of return (in the form of cash) from your dividends.
Something else to note is that most individual companies aim to increase their dividends every year! So not only can you lock in a stream of passive income when you buy a dividend-paying share (if all goes well for the company), you might also get a pay rise every year as well.
So if you really want to boost your wealth, take your cash out of that impotent savings account, and start shopping for some real return in the stock market!
