Owning the right types of ASX share investments can deliver excellent returns through a mixture of capital gains and passive income.
I love the idea of owning businesses that are capable of producing large returns for investors, though we don't know for sure which stock will be the next strong performer.
I also like the idea of owning ASX shares that want to reward long-term shareholders with pleasing passive income. Receiving dividends for very little ongoing work sounds appealing.
Wouldn't it be great to own a business that provided a mixture of both share price growth and good dividends over time?
Here's how I'd invest for that goal.
Strong ASX growth shares
ASX growth shares that are growing revenue/earnings at a good pace have the capability of compounding the underlying value of the business at a pleasing speed.
Many of the best businesses on the ASX have impressed the market for many years with the impressive expansion of their product or service across the country (or the world). I'm thinking of ASX shares like Pro Medicus Ltd (ASX: PME), REA Group Ltd (ASX: REA) and TechnologyOne Ltd (ASX: TNE).
If the market hasn't accurately judged these companies' growth potential, it can lead to good returns in the short term and long term.
Earnings growth and capital growth are one thing, but how do these sorts of stocks provide good dividend payments?
Passive income payments
Firstly, the board of directors need to decide to start paying dividends to investors.
Initially, that dividend yield for an ASX growth share may be quite low compared to a typical ASX dividend share's yield. Let's imagine it's a starting dividend yield of 2%.
If that business grows its earnings per share (EPS) by an average of 15% per year and maintains the same dividend payout ratio, then the passive income payments can increase by an average of 15% per year, too.
After a decade of strong growth at 15% per year, the dividend yield (compared to the original cost of that investment) would have risen to just over 8% and could continue growing at an impressive rate in the subsequent years.
Keeping the long-term in mind with these sorts of stocks can really pay off. However, ideally, we'd identify these incredible stocks several years earlier in their growth journey than today. The earlier, the better.
When you combine share price growth with a rapidly rising passive dividend payment, I believe it can lead to successful investments. For example, if someone had invested in TechnologyOne shares a decade ago, they'd now be getting a grossed-up (including franking credits) dividend yield of more than 7% and share price gains of more than 600%.
The tricky part is finding the next ASX share that's going to deliver enormous earnings growth.
