Two hypothetical ASX investors meet in a café and get talking. After establishing that both are interested in the markets and ASX shares, the next question that is likely to be posed might go something like this: 'are you a growth investor or a dividend investor?'.
Whilst this isn't a binary choice (there are many types of investing styles and one can pursue more than a single strategy), you'll find that most investors will have more of a foot in one camp than the other.
Myself? I identify as more of a dividend investor. Whilst I do own shares that don't pay dividends, most of the shares that I both own and am watching do pay dividends.
This isn't by accident. I believe dividends are a great metric to measure the potential success of a company and also form a vital component of the long-term returns you can expect from a portfolio.
The advantages of ASX dividend shares
To illustrate – let's take a typical ASX index fund like the SPDR S&P/ASX 200 Fund (ASX: STW). This fund represents the performance of the 200 largest ASX companies, as measured by the S&P/ASX 200 Index (INDEXASX: XJO). Since 2001, STW has returned an average of 8.35% per annum. Of that 8.35%, a substantial 4.7% comes from dividend income alone, with the remaining 3.65% stemming from capital growth.
But that's a very vague (if not informative) statistic, so let's look at some real advantages of dividend-paying companies.
Whenever a dividend is paid, it actually weakens the company that pays it – think of it like a business giving its profits away. Therefore, in order to be able to afford consistent dividend payments, a company must be fundamentally strong.
If we look at a dividend payer like Washington H. Soul Pattinson and Co. Ltd (ASX: SOL), we can see that it has paid a dividend every year since 1903 – and has raised this dividend every year since 2000 (even through the GFC). That indicates to me that the foundations of 'Soul Patts' are extremely strong, and the company is a prime candidate for a long-term investment.
Dividend payments also help immensely in the event of a stock market crash. Although some companies might cut their payouts during a severe recession, most will still be paying their shareholders in good times and bad. That means your portfolio will have a cushion against capital losses.
Foolish takeaway
Of course, dividend investing is not an easy path to take – there are a lot of traps to watch out for and tricks to finding good long-term investments. But it's a path that I find rewarding and lucrative.
