The share market can be both a help and a hindrance when it comes to building wealth. But it's only ever a hindrance when investors let it be.
The market is a funny thing. We all love the liquidity that comes from having shares fluctuate in value on a daily basis. But having the quoted prices of our assets changing constantly can also be very unnerving. Particularly in a market crash or similar event.
Market crashes aren't common. But they do come around sooner or later. And they can have an extremely negative impact on investors' mindsets. Imagine if you had 80-90% of your net worth invested in the share market during the global financial crisis of 2007-2009. At one point, you would have seen the value of your portfolio decline by more than 50%.
So how can one hope to retire rich if the market falls like that? After all, it took several years for the ASX 200 to recover from the global financial crisis. That's a lot of years to live off a reduced asset base.
Well, the answer is dividends.
Most investors are familiar with dividend payments. In fact, many would probably think the passive income you can get from a dividend share is one of the best things about investing in the stock market.
But what most investors might not realise is how much dividends contribute to investors' overall returns here on the ASX.
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Dividends are the key to retiring rich – especially in a stock market crash
To illustrate, let's examine one of ASX's oldest index funds. The SPDR S&P/ASX 200 Fund (ASX: STW) has been listed on the share market since 2001, As such, it has a very enlightening history we can look back on.
So according to this ETF's provider, this ASX 200 index fund has returned an average performance of 7.86% per annum since it first listed in 2001, assuming dividends are reinvested.
But of that 7.86%, only 3.19% per annum comes from capital growth. The remaining 4.67% per annum hails from dividend income. That's not even close to a 50-50 split.
During a market crash, it's capital returns that get hit hard. But many ASX dividend shares keep their income taps open. During the COVID crash of 2020, the ASX 200 fell by roughly 32.5% top to bottom:
But many ASX dividend shares kept paying dividends.
BHP Group Ltd (ASX: BHP) supported investors with a solid $1.75 in dividends per share. Fortescue Metals Group Limited (ASX: FMG) did the same, paying out one of the larger annual dividend payments in its history at $1.76 per share.
It was a similar story with Woolworths Group Ltd (ASX: WOW), Coles Group Ltd (ASX: COL), Wesfarmers Ltd (ASX: WES) and Telstra Group Ltd (ASX: TLS).
During market downturns, the dividend payments from ASX shares can still keep you happily retired. You might not feel rich, with the value of shares fluctuating wildly. But the returns from dividends can certainly help you to stay afloat until the markets can recover.
