Focus on Dividends for a brighter future
People are always asking me questions about the sharemarket; is it going to go up or down? Is it a bad time to invest? Things are looking shaky in Europe, should we move to cash?
I haven’t the slightest idea where the market will be in 6 months from now. What I do know is that for those of us working to accumulate wealth, we should hope that it is down. Down you say? YES, down!
You see, share prices are driven by the fear and greed of people who own shares. These emotions are largely guided by media scare mongering through the dramatisation of any mildly negative piece of information by plastering this garbage on the front page of our daily newspapers, on the nightly news and online. As John Bogle says in the very first line of his book, ‘Successful investing is all about common sense; it is simple, but not easy.’
Dividends, on the other hand, are an accurate reflection of a company’s profit. In 2008, Woolworth’s share price dropped 21.50% (driven by investors fears about the GFC), yet their dividend increased 24.30% (as a result of an increase in profits). Mum and dad investors were scared. However – Mum, dad and the children, still eating? Fact!
Let’s say, for example, that you are 30 years old and have established that you would like to have the financial freedom that work becomes a choice by the age of 55, and have predicted that $50,000 per year in today’s dollars is what it would take to enable you to do all the things you want to do in your life. Now let’s assume you have decided on Commonwealth Bank (CBA) shares as your chosen source of income, and have set out to accumulate enough CBA shares to give you sufficient income to meet your goals (this is for the purpose of this example only, and not a recommendation to run out and buy CBA shares, although there are worse strategies out there!). Based on the income per share paid in 2011 of $3.20 (excluding Franking Credits which would be on top of this if you’re not working), you would require 15,625 CBA shares to reach you goal. Let me now ask you; how much per share would you like to pay for those CBA shares? Would that be $62.16 per share (the highest share price reached in December 2007) costing you $971,406 to obtain 15,625, or $24.03 per share (the low reached in December 2009) costing you just $375,468 to obtain your target of 15,625 shares?
Knowledge, understanding and education are the key ingredients in enabling you to achieve your goals. With the right advice and disciplined planning, the opportunity to purchase a piece of our nations wonderful productive enterprise at low prices can bring your retirement goals forward.
Our great companies are now arguably in the greatest shape they have been in; the GFC caused companies to tighten their belts, cut costs and reduce their debts, and we are now seeing companies with large amounts of cash on their balance sheets ready to invest in their future.
Once you truly understand the consistency, reliability and tax-effectiveness of the dividends available from human endeavour in action, seeing a path to achieving you goals becomes clearer. To quote a long-term client of ours, ‘for years I watched the All Ordinaries hoping it would go up. Now I hope it will go down. I know the dividends will keep coming in.’
So what will you do? Sit back, procrastinate and ‘wait for things to improve’? Or, take action, implement a plan to make your goals a reality now, and share in the spoils of what are currently some great opportunities to grow your income stream
By Steven Nickelson, Certified Financial Planner
Please note :
The advice on this site is of a general nature only and has not been tailored to your personal circumstances. Please seek personal advice prior to acting on this information.
