I've been investing in ASX shares for many years now, and have been fortunate enough to build up a decent portfolio of both Australian and international stocks. It being close to June, and with tax time just around the corner, I've recently been doing some much-needed bookkeeping and maintenance on said portfolio.
In the course of tallying up all of the dividends and franking credits I've received over the year, it dawned on me that, as a proportion of my total portfolio's value, the dividends that I've brought in over the past 12 months or so give my portfolio a dividend yield of just 1.78%.
This came as quite a surprise, as I expected something in the 3% ballpark. After all, I own quite a few dividend-paying shares, which are no slouches in paying out big, fully franked yields. For instance, I count the likes of Telstra Corporation Ltd (ASX: TLS), Wesfarmers Ltd (ASX: WES), and National Australia Bank Ltd (ASX: NAB) amongst my many holdings.
In addition, some of my favourite stocks, such as MFF Capital Ltd (ASX: MFF), Plato Income Maximiser Ltd (ASX: PL8), and Endeavour Group Ltd (ASX: EDV), all sport substantial yields.
But, upon deeper analysis, this rather low yield isn't too surprising.
Dividends and yields in my ASX share portfolio
Although the dividend shares above make up a decent chunk of my portfolio, they are still outweighed by the investments that don't pay much of an income. For instance, four of my largest positions are Google-owner Alphabet Inc (NASDAQ: GOOG)(NASDAQ: GOOGL), Meta Platforms Inc (NASDAQ: META), Mastercard Inc (NYSE: MA), and Visa Inc (NYSE: V). None of these stocks is currently trading on a dividend yield greater than 1%.
Other positions pay no income at all. I have a legacy position in Tesla Inc (NASDAQ: TSLA), as well as substantial investments in Duolingo Inc (NASDAQ: DUOL), Amazon.com Inc (NASDAQ: AMZN), Berkshire Hathaway Inc (NYSE: BRK.A)(NYSE: BRK.B), and even Bitcoin (CRYPTO: BTC). None of these investments pays any kind of yield.
Now, I love receiving a dividend as much as anyone. Yet, my ASX share portfolio's rather pitiful dividend yield doesn't bother me at all.
There are two reasons why.
A low dividend yield can be a wonderful thing
Firstly, most of my holdings that either pay very low dividends or none at all have the capacity to. They just choose to reinvest the money that could be spent on dividends back into their respective businesses. Usually, they can do this at a very high rate of return, one that I probably wouldn't be able to replicate if I received the cash instead.
As such, I'm happy to see the money go back into these companies, with the expectation that they will generate even greater returns (and probably dividends) down the road.
None other than legendary investor Warren Buffett has said that this is a great thing to witness. Here's his response when asked about this matter back in 2008:
Well, the answer is I do believe in dividends in a great many situations, including many of the ones at companies in which we own stock. The test about whether to pay dividends is whether you can continue to create more than one dollar of value for every dollar you retain. And there are many businesses, take See's Candy, which we own.
See's Candy has paid everything, virtually, out to us that they earn because they do not have the ability within See's Candy to use large sums, which they earn, intelligently in their business. So it would be an enormous mistake for See's Candy to retain money. So they distribute to Berkshire, and we hope that we move that around in some other area where that dollar becomes worth $1.10, or $2.10, in terms of present value terms.
Secondly, dividends, particularly the unfranked ones that US stocks pay me, are not an ideal way to realise a return from an investment from a tax perspective. When I, or anyone else, is paid a dividend, we have to declare it as income and pay our dues to the Tax Office for the pleasure of receiving it.
However, we do not have to pay taxes on the returns that stem from the company reinvesting that capital instead. We can watch those gains compound over time, untaxed, as our shares increase in value. It's only when we eventually sell those shares that those gains are taxed. And that is optional.
Foolish Takeaway
Dividends are fantastic, and one of the most potent rewards of buying international or ASX shares for my portfolio. However, until I retire and need dividend income to pay my bills, I am more than happy to let the companies in my portfolio keep their cash and grow it on my behalf.
