Dividends vs growth: what really counts?

Where returns come from

With shares, your return can come from two places: the price changing and any dividends the company pays. ETFs may also distribute income from what they hold. A dividend isn’t bonus money on top of everything else, and neither payments nor gains are guaranteed.

A dividend is not bonus money

When a security goes ex-dividend, its price generally adjusts to reflect the cash leaving the business, although other market forces can move the price too. Looking only at the cash payment can give a misleading picture.

Compare total return

Total return considers both changes in the investment value and distributions over time. The timing and tax treatment of distributions, including franking credits where applicable, may still matter for an Australian investor.

Why a dividend is not extra money appearing

Imagine you own shares worth A$1,000 and the company pays you a A$40 cash dividend. Around the ex-dividend date, the market price will generally adjust to reflect that cash leaving the company, although ordinary market movements can hide the effect. You have cash in your account, but that payment is part of the investment's overall return, not a guaranteed A$40 bonus on top of an unchanged share value.

A company that keeps profits to expand may not pay much in dividends but could still grow in value. Another company may pay regular dividends while its share price falls. Neither label tells you the full story.

Compare what you actually keep

1. Look at total return: share-price change plus dividends or distributions, allowing for any reinvestment assumptions.
2. Check whether the business or fund can sustain its distributions, rather than chasing the highest yield.
3. Consider tax: Australian franking credits and tax on distributions or capital gains can affect individuals differently.
4. Think about whether you need cash income now or are investing for later.

You don't have to choose between “dividend investing” and “growth investing” as competing teams. A diversified portfolio can contain both kinds of businesses.