A very good short article that reminds share market investors of the role dividends play. This can provide comfort to our readers when share markets are particularly volatile.
When we invest in the share market we like to see our shares increase in value – obviously – but when the market isn’t performing well instead of joining everyone in the doom and gloom, don't forget about dividend income.
In Australia, unlike many other countries, we are fortunate that most of our companies pay an excellent rate of dividend. These usually include credits for tax paid by the company, referred to as “imputation” or “franking” credits. As an example of the benefit, if you deposit your money in one of our major banks’ online savings accounts you will probably receive an interest rate of around 3% per annum. And these rates will follow the movement of interest rates.
If you buy shares in that bank you are likely to receive a dividend in the region of 5-7% per annum. It is even better if the dividend is fully franked, as this would be equivalent to a pre-tax rate of 7-9% per annum. And when a market downturn causes share market prices to fall, most companies continue to pay a steady dividend.
Not all Australian shares are fully franked or have as high a yield as the example above. However, if you look at the average dividend yield for the All Ordinaries Index it is in the region of 4% with an average franking rate of 80%. This can give you a pre-tax return of some 5%.
The moral to this story is when planning your share portfolio don’t focus entirely on the growth aspect – remember the dividends.
For more information, contact us at Leenane Tempelton on 02 4926 2300 or email success@leenanetempleton.com.au
