Once upon a time, investing specifically for drawing an income was pretty much the standard way to invest in the stock market. Things have changed however both with investor styles and how businesses deal with their profits. Nevertheless investing for income (return), while no longer 'sexy' is still an important investment approach.
We've all known or read about times past when widows lived comfortably off their Merrill Lynch accounts or similar - all down to a lifetime of investing by their late manager husbands/fathers (yes, back in the era of the single male breadwinner) who inevitably died of the then ubiquitous heart attack in their very early 60s. However, this returns-for-income investing approach seems to have gone out of vogue nowadays (the investing part I mean, not the heart attack part!).
These days, investing for pure growth rather than returns is much more in vogue ..... and for a long list of valid reasons that I will not delve into at all in this post. Day trading and stock growth watching over the last 30 years have certainly encouraged growth-investing too (just look at the news and see what it shows - that's right, growth and stock value fluctuation). Investing for growth is all very front-of-mind these days.
However, consider for a moment the benefits of investing for income returns - as follows:
- Dividends still pay despite stock value
- Fluctuations in stock value are less important
- Dividend franking (paid company tax) is highly desirable for personal tax purposes
- Dividend reinvestment can be entered into
- 100% dividend franking (fully prepaid company tax) is achievable
- Provides a regular income for those requiring it
- Flexibility to either reinvest the dividends or take them as cash
- Allows your portfolio to be either growth or return focused (see previous point)
I personally have 1/2 my portfolio geared to income returns via dividends and deem this as the conservative and stable part of my portfolio (I'm not a believer in bonds as true long-term investments). Luckily, Australian companies pay much higher dividends on average to non-Australian companies thus making the dividend/return approach to investing very achievable for Australians.
Now I am not a financial adviser, so definitely do your own research on the topic. I only write this to encourage you all to research and get interested in investing wisely the old fashioned way ..... at least in part.
Take care folks and stay nice
Mr HM (Phil)