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Why you need to look at the total return from an investment and not focus solely on dividends

by , 02 July 2015

A company paying dividends is a good sign. It shows you the company's in a good financial position. If the company raises its dividends over the years, that's an even better sign.

The income from dividends forms part of your investment return.

But when looking for good investment prospects, don't ignore companies that don't pay you an income.

Here's why…


Focusing on shares paying dividends can be detrimental


Many investors who are in the market for the long run have a tendency to focus on shares paying dividends. They want income.

But you don’t need income from all your shares, especially if you’re still working.

If you seek financial independence, you want to have liquid assets that you can easily covert to cash. This isn’t the same as income, Alexander Green in Investment U explains.

Take this as an example…

Companies can produce stellar returns and never pay dividends


Warren Buffett’s Berkshire Hathaway. This company has never paid out a dividend to its shareholders.

Instead of opting to pay dividends, Berkshire Hathaway has put its cash to work and made its shareholders a 19.7% average annual return for nearly 50 years.

If you’d invested R10,000 in Berkshire Hathaway at the start, it would now be worth R67 million.

You might like your dividends, but any investor would be happy with that return on an investment over nearly five decades.

If you can find a company that rewards you consistently over the years with returns and doesn’t pay dividends, you can always sell some shares to help meet your expenses.

You should look at the potential total return an investment can give you, not just what you can earn from dividends.

So there you have it. Why you need to look at the total return from an investment and not focus solely on dividends.

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Why you need to look at the total return from an investment and not focus solely on dividends
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