Dividend vs Growth Shares on the ASX

Dividends from shares are a great source of passive wealth. Many new investors however, make the mistake of focusing too much on the income from shares, the dividend, and not enough attention on the capital growth, or rise in the value of the shares.

Shares paying high dividends are attractive, but that’s not always a good sign, since the company is returning so much of its profits to investors, rather than focusing on growing the company.

TLS, one of Australia’s most popular dividend paying shares, is an example of what the long-term costs of focusing on dividend income is, against companies that have more of a growth focus.

To understand the difference in investment performance of both share value and dividends we look at $10k invested in the TLS IPO of Nov 1997, versus that same $10k invested in CSL, CBA or ‘The Big Australian’ BHP.

At the time of the TLS IPO, your $10k would have got you $660, or 6.6% in dividends.

BHP was 9.34%, CBA 5.81% and CSL a paltry 1.72%, only $172 in annual dividends for the $10k.

Over the 23 years to 2020 these Australian companies have been through the tech bubble to tech wreck in early 2000; the introduction of Australia’s GST; the Sydney Olympics; the Mining boom; the GFC; strong investment rotation to yielding shares and bond proxies (such as TLS and CBA) as the interest rates continuously fell; markets' favour of small and mid-cap shares moving to a preference to High-PE (growth shares) and finally the fasted market collapse in history with CV-19 in 2020.

Amazingly 23 years later, Telstra pays half the original dividend amount of $330 on the initial $10k, or 3.3%.

CSL pays 27.4%, BHP 42.7% and CBA a whopping 79.8%.

With CBA you almost get your whole initial investment back in dividends each year.

While CSL seems to pay the smallest dividend of the companies that have actually grown, the amount of dividends investors receive has increased the most, more than 10x the original dividend amount, whereas BHP and CBA are only about 4 times.

The real wealth creation comes from growing share prices plus dividends:

The total return of the $10k and dividends in TLS is now worth $32,400.

CBA $63,400, or $84,100 if you had used the DRP when possible.

BHP $81,100.

CSL a staggering $279,500.

The eclipsing performance of CSL highlights that investing for yield over the long term is best done through a consistently growing yield from the investment rather than a higher starting yield.

This signifies that growth companies are the best way to increase the income of a portfolio over time and are a worthwhile consideration for most portfolios.