It's dividend season!
Although revenue growth across the S&P/ASX 200 (index: ^AXJO) (ASX: XJO) companies slowed to a trickle for the most recent reporting period, total dividend distributions to shareholders grew by 2.2% according to CommSec, which could mean more money coming your way.
But before you go out and splash the cash, here is a reminder of the two best things you can do with that extra money:
- Pay down any debt (credit cards, mortgage or other debt)
- Reinvest your dividends
Paying down debt is like locking in an after tax return of the interest rate you pay on the debt. For credit cards especially this can be huge, so one of the best uses for any spare dividend cash is to get rid of debt.
After debt payments, reinvesting dividends to compound over time is the second best use for that dividend cheque.
This year Woolworths Limited (ASX: WOW) and Telstra Corporation Ltd (ASX: TLS) will be among the companies rewarding investors with greater than average dividend growth.
Woolworths Limited (ASX: WOW) announced an interim dividend of 67 cents per share (CPS), up 3.1% on the same period in 2014. The dividend comes fully franked and will be paid on 24 April, 2015.
Likewise Telstra Corporation Ltd (ASX: TLS) announced a 3.4% increase to its half-year interim dividend to 15cps. Telstra's dividend also comes fully franked and will be paid this week on 27 March.
To give you an idea of the value of reinvesting dividends consider a hypothetical situation, where you own 1,000 shares in Telstra today, at the current share price, and receive the annual dividend of 30cps.
If earnings per share (and therefore Telstra's share price) grow at a conservative 5% per year (Telstra's average compounded earnings per share growth rate is 7% over the last four years), and dividends continue to grow at 3%, after 10 years the total value of the holding without reinvesting dividends would be around $13,920.
With dividends reinvested this number jumps to $15,720. An extra $1,800 and a huge 13% increase in total return.
Dividends don't have to be reinvested in the same company. Although dividend reinvestment plans help save on brokerage fees, you may prefer to maximise your money by funnelling it into your top one or two companies.
The takeaway for investors is if you're serious about making your money work harder, use dividends to pay off debt, or reinvest to grow.
