ASX dividend investing is a great strategy because of a few key advantages for Australians. I love it, which is why a large part of my own portfolio is focused on ASX dividend shares.
Putting it simply, a dividend (or distribution) is when a company pays some of its generated profit to shareholders. It has to have made a profit that year or a previous year to pay a dividend from its retained earnings.
Here's my reasoning for why ASX dividend investing makes so much sense.
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Profitable businesses
For a business to regularly pay dividends, it needs to consistently make profits.
A company that's consistently making a profit is, in my eyes, more reliable and safer than a company that hasn't made a profit.
Plenty of unprofitable businesses don't 'make it', so I think dividend-paying businesses may give us a relatively good chance of making a decent return.
The whole point of a business is to make profit, and dividend-paying companies have ticked that box.
Franking credits
The best thing about ASX dividend investing in Australian companies, like Telstra Group Ltd (ASX: TLS), is that they attach franking credits to paid dividends, which Australian tax resident individuals can benefit from.
Franking credits are refundable tax credits – they boost the taxable income. They can be refunded on a tax return if a taxpayer's tax credits (such as franking credits and taxes on wages) are more than the taxes they have been charged by the ATO for that financial year.
Franking credits mean that a $70 franked dividend turns into a grossed-up dividend income of $100. In yield terms, it boosts (for example) a 3.5% dividend yield into a 5% grossed-up dividend yield.
It's a very generous system, one of the most generous in the world. It's useful for reducing the tax burden for working people and can help create large tax refunds for retirees.
Potentially reduces taxable gains and brokerage
One of the tricky things with owning non-dividend paying shares is there's really no way of accessing the growth/profits without selling shares and activating a capital gains tax event.
If I own a great business, I'd rather hold all of the shares I can rather than sell down some of my position, ideally.
Selling shares to access cash and use in one's personal life may be necessary. Dividend payments can allow investors to share in the rewards of holding for the long term and benefit from the growth.
Reducing the amount of transactions we make will hopefully reduce the amount of capital gains tax we pay and should mean less brokerage too.
Calmer investment style
Share prices move around all the time. Following share price movements may not help us sleep soundly at night. Looking at the market all the time may cause unnecessary stress.
As long as we invest in high-quality businesses that are likely to grow profit well over time, it doesn't matter what happens in the short term.
But, we do want to see returns, so receiving a regular dividend could be reassuring and rewarding. If investors focus on a growing dividend payment – which the board has control over – then ASX dividend investing could be a much calmer experience.
A business that pays dividends could achieve better returns, and help us stick with a long-term investment strategy.
