Dividend Paying or Growth Companies ?
Dividend Paying or Growth Companies?
We have received some wonderful feedback from readers of our last article Good Dividend Paying Companies. As expected, the most popular questions were ‘what is the name of the growth company?’ and ‘are there any other companies that will produce this amount of growth’.
The comparison I made was between one of Australia’s most popular ‘good dividend paying’ companies versus one of Australia’s most successful growth companies, which is a growth company that my clients have been in since 1999.
In 2005 the good dividend paying company had a turnover of more than 10 times the growth company, made 40 times the profit, and was paying a high dividend yield of 6.5% versus 1.6% from the growth company.
Fifteen years later the good dividend paying company had delivered $91,231 in dividends, plus franking credits. But today if you had invested $100,000 in the growth company you would have $2.48m more wealth than if you had chased yield with the good dividend paying company. How could this be possible?
Well, while the good dividend paying company had increased their revenue by 1.75% per annum, their focus was paying out nearly all of their profits as dividends to shareholders. Yes, they were still paying a reasonable dividend of 4.2% this year, but their share price had actually fallen, the $100,000 invested was now worth $64,803 and their dividend in dollar terms had fallen to only $2,722.
This dividend paying company is at top20 Australian company, but it is not a bank, although the outcomes are very similar, as we have seen a 40% decline in the S&P/ASX200 Bank Index over the last five years, which more than offsets any dividend received.
In 2005 the growth company was only paying a 1.6% dividend, as they retained the majority of their profits each year for research and development, along with major acquisitions. Consequently, the growth company‘s revenue increased by an average of 25% each year, and the share price increased by 2,300% over the 15-year period, so that the original $100,000 investment was now worth a $2.46 million.
While their dividend yield remained low at 1%, the rising share price meant that the dollar value of the dividend also increased, was an attractive $27,000 this year, and amounted to $171,025 over the 15 year-period.
The financial outcome between investing in a good dividend paying company and a growth company is so stark. The difference is likely to be even more pronounced over the next decade. With the uncertainty that you are now faced with, it is vital to be in the right investments to take advantage of the changing world, rather than be stuck in the old world of chasing yield.
I’ll write next week about an alternative way of providing an income stream rather than chasing yield, but in the meantime if you would like to meet with me to discuss your unique circumstances, please do not hesitate to contact my office.
BCom DipFP CPA CFP CFS JP
Harvard Business School 2011
Authorised Representative (No. 224334)
Chief Executive/Financial Strategist
Lanham Financial Advice