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Why dividends are your best friend in this ASX bear market

In this ASX bear market we are currently enduring, it can be very easy to write off the share market as being ‘useless’, a ‘waste of time’ or even a ‘casino’ where the house always wins.

While it’s never fun seeing the value of your own ASX share portfolio drop significantly, it’s also a time to step back and have a look at the bigger picture.

The Australian stock market has gone through many calamities in its 159-year collective history. From two World Wars, a Great Depression, a dot-com bubble, the ‘recession we had to have’, a couple of other wars, a global financial crisis and even other pandemics – the ASX has always come out the other side and reached new heights.

As we will after this crisis eventually abates.

But in times like this, I think all investors should be reminded of the importance of dividends to your long-term returns (dividends you can’t receive if you’ve sold your shares).

In recent years (which seem like a lifetime go now), the ASX has been booming, recording close to 25% in returns just last year. During this bull-market, dividends were often forgotten. Some of the biggest gaining shares in recent years have been companies that pay little or no dividends – just think of CSL Limited (ASX: CSL), Afterpay Ltd (ASX: APT) and Xero Limited (ASX: XRO).

Are dividends even that important?

Yes, they are! Dividends have historically formed a huge component of the ASX’s total return. And it’s crashes like the one we’re in that remind us of this fact.

See, dividends typically roll through the door in good times and bad. Companies might trim (or even scrap) dividend payouts in hard times, but many don’t.

For some proof, lets look at a broad index fund like the SPDR S&P/ASX 200 Fund (ASX: STW), which tracks the 200 largest public companies in Australia through the S&P/ASX 200 Index (ASX: XJO).

Since its inception in August 2001, this ETF has returned an average of 7.85% per year. That’s through the good times and the bad (like the GFC). Of this 7.85% per annum, only 3.19% has come from capital growth. The rest? From dividends of course.

That’s 4.66% from dividend returns – more than half!

Foolish takeaway

During bear markets, dividends cushion your portfolio from capital losses and even help build the foundations for future prosperity (assuming you deploy the dividends back into the shares that have crashed). So don’t diss your dividends, they’re your best friend right now.

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Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of CSL Ltd. The Motley Fool Australia owns shares of AFTERPAY T FPO and Xero. 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.