Ask An Advisor

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Buy, Hold, Sell

This week on Equity Mates Investing podcast re released the second episode of Buy or Sell with Adam. Last week’s episode was a cracker, so tune in if you missed it!

The week’s question

“Is Dividend investing worth it if you’re younger (mid-20s) in ‘accumulation’ phase? 

- Derek, QLD

This week’s advice

This week’s advisor is Samuel Fenning from Advise Wise.

When evaluating any investment strategy, irrespective of one’s life stage, it is vital to consider the financial objectives, the risk tolerance (the extent and comfort with risk exposure), the risk capacity (the ability to withstand potential losses) and the associated timeframes.

Dividend investing involves buying and holding shares with the primary purpose of generating income from dividends paid by those shares.

Dividend investing in Australia has a unique aspect in the fact that dividends often include franking credits, which can lower income tax.

This approach has its own set of advantages and disadvantages, including:

Pros:

• Regular Income: Dividend paying shares can provide a consistent stream of income, which can be useful for covering living expenses or reinvesting in additional investments.

• Tax Advantages: Dividends often attract franking credits which can reduce the overall tax paid by the investor.

• Compound Growth: Reinvesting dividends can lead to the compounding effect, where the initial investment grows exponentially over time.

• Diversification: Dividend shares can offer diversification in a portfolio depending on the companies used (i.e., from different industries or sectors) and the existing strategies in a portfolio.

• Long-Term Focus: Dividend investing encourages a long-term perspective, which can be favourable for younger investors who have time on their side.

Cons:

• Lower Growth Potential: Dividend shares may not provide the same level of capital appreciation as growth shares, which can limit the overall capital growth in a portfolio.

• Income Tax: While dividends can provide income, they are also subject to income tax. This can reduce the overall return on the investments (often called Total Return).

• Limited Diversification: While aspects of this strategy have diversification benefits, this strategy can also limit diversification by solely relying on dividend paying shares, as this may increase the exposure and reliance on certain industries and sectors.

• Market Risk: Even dividend paying shares can be affected by economic downturns and market fluctuations.

• Opportunity Cost: By focusing on dividend shares only, there are potential returns that could be sacrificed at the cost of not investing in other types of shares as well as other asset classes.

• Company Risk: Not all companies with high dividends yields are financially stable. Investing in poorly managed or financially troubled companies can lead to dividend cuts or even bankruptcy.

In conclusion, dividend investing can be a prudent strategy for young investors who seek income, stability, and a long-term approach. However, it’s important to balance your portfolio and consider other investments to achieve diversification and consider the trade-offs between income and growth.

The individual goals, risk tolerance, risk capacity and timeframes will ultimately help determine whether this strategy is suitable.

Seeking advice from a financial adviser can ensure you make informed decisions tailored to your specific circumstances.

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About Samuel Fenning

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