What's a better asset to own if you want a second income, gold or ASX 200 dividend shares? If you've read the headline, you'll probably guess our position on this question.
Gold is, of course, a legitimate asset to invest in. It arguably has inflation-resistant properties, physical value and has been used as money for thousands of years. But gold is not an income-producing asset, and therefore has limited value outside a small cog in a large, diversified portfolio.
What's wrong with gold?
But don't take it from me, take it from legendary investor Warren Buffett. Here's some of what Buffett said about gold back in 2011:
Gold, however, has two significant shortcomings, being neither of much use nor procreative.
True, gold has some industrial and decorative utility, but the demand for these purposes is both limited and incapable of soaking up new production. Meanwhile, if you own one ounce of gold for an eternity, you will still own one ounce at its end.
That's the key point to take away here. An ounce of gold may be worth a pretty penny. It might even be worth two of those metaphorical pretty pennies in 20 years' time.
But you will have nothing else to thank you for your time. Contrast that with an investment property. 20 years' worth of rental income is nothing to turn one's nose up at.
Or perhaps a farm. Think about how much food a farm can produce over two decades. These are the kinds of assets you'd want to invest in if you wanted a second income. Not gold.
But investment properties and farms are expensive. That's why ASX 200 dividend shares are a great place to start for any aspiring passive income investor.
Which ASX 200 shares are good for a second income?
The ASX 200 is full of dividend-paying shares that have been paying their investors income (as well as franking credits) for decades. There are the big four banks, such as Commonwealth Bank of Australia (ASX: CBA) and Westpac Banking Corp (ASX: WBC).
If you'd like to start a second source of income, these shares have some of the highest yields out of the top 20 companies on the ASX. For example, Westpac shares currently offer a trailing dividend yield of 5.97%.
Mining giant BHP Group Ltd (ASX: BHP) has an even higher trailing yield on the table, at 8.44%. Oil stock Woodside Energy Group Ltd (ASX: WDS) tops even BHP with its dividend yield of 9.83%.
But miners and energy shares have highly cyclical earnings built on commodity prices. Thus, their dividends can be volatile. That's why many investors balance these kinds of ASX 200 dividend shares with more stable, defensive dividend payers.
Those might include Telstra Group Ltd (ASX: TLS), Woolworths Group Ltd (ASX: WOW) or Coles Group Ltd (ASX: COL). These shares might have lower dividend yields but command more durable profit bases.
Dividends for decades
If you are still a decade or a few away from retirement, you might want to branch out into finding the dividend beasts of tomorrow by looking for dividend growth stocks on the ASX 200.
Back in June, we discussed how a low dividend yield can be a beautiful thing if the company that pays it has a long growth runway in front of it. Investors in Washington H. Soul Pattinson and Co Ltd (ASX: SOL), for example, have enjoyed more than 20 years of annual dividend raises.
As we calculated, an investor who bought into this company in the year 2000 would today be getting an annual dividend yield of more than 22% per year today. Now that's something gold just can't provide.
