Dividends from ASX dividend shares could be one of the most useful and rewarding aspects of investing.
Businesses can decide to pay out a certain amount of their profit as a dividend or distribution each year.
Some companies decide to pay out most, or all of their dividend. Others can decide to retain a lot of it to reinvest in the business.
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How much do dividends make up of the return?
Depending on the investment, dividends could make up a large part – or even the majority – of the return. BHP Group Ltd (ASX: BHP) would be an example of a business that pays out a significant amount of dividends each year.
If we look at the ASX share market as a whole, by scrutinising the Vanguard Australian Shares Index ETF (ASX: VAS), we can see that in the ten years to 31 August 2022, it made an average return of 9.25% per annum, with the distribution making up 4.7% per annum of that – just over half of the overall return. This exchange-traded fund (ETF) tracks the S&P/ASX 300 Index (ASX: XKO) if you were wondering.
There are plenty of other ASX shares that do pay dividends, but for some, the dividends only make up a small portion of the returns over the long term. Examples include names like Altium Limited (ASX: ALU), Pro Medicus Ltd (ASX: PME) and WiseTech Global Ltd (ASX: WTC).
Is it good for ASX dividend shares to make payments?
Depending on the business, there are a number of benefits.
They enable investors to benefit with 'real' cash returns from the profit and growth of the business. Investors don't need to sell any of their position to extract some of the returns.
Another factor that's good about businesses making payments is that the cash isn't wasted. Cash could be used to pay off debt, which wouldn't be a bad idea. But, management could feel like the money is burning a hole in their pocket and make a poor/bad acquisition.
It's true that all of the dividend cash could be used to reinvest in the business for more growth. Xero Limited (ASX: XRO) and Berkshire Hathaway are two examples of businesses that have reinvested well for long-term growth.
One of the best reasons for Australian companies to pay dividends is that it unlocks the franking credits. When Aussie companies make a profit and pay corporate income tax, they generate franking credits which can be attractive because it's a refundable tax offset. Franking credits reduce how much tax is owed to the ATO, or can be refunded.
What are some other examples?
There are a number of ASX dividend shares that pay fully franked dividends like BHP, Wesfarmers Ltd (ASX: WES), Telstra Corporation Ltd (ASX: TLS), Brickworks Limited (ASX: BKW) and Premier Investments Limited (ASX: PMV).
Depending on an investor's objectives, different ASX dividend shares could be attractive. For example, how reliable or large are the dividend yields expected to be?
