Even Running Around in Circles Can Pay Dividends

So we’ve decided to chronicle our attempt to join an Aussie Rules football team. Markets and Money seems like as good a place as any to do this for your amusement. Thrilling, right?

Monday’s session revealed that it’s useful if you’re fit. While we quietly died on the sideline, some coach’s favourite yelled out ‘this will have benefits in the future, boys. Just think of when we’re three goals down in the last quarter and we run out a team!’

Running out a team probably means beating them with superior speed and stamina. But an Aussie Rules game lasts so long that we get tired just watching it on TV, let alone running around the whole time. The idea of being behind three goals after three quarters of running is just horrifying.

Stock market investors have had that very similar experience over the last few years. They’ve leapt for joy, put their head in the sand, bought, sold, cried tears of joy and pain. All that and the ASX has been in a holding pattern for years. It goes up, it goes down, it goes nowhere.

ASX200 Going Nowhere

ASX200 Going Nowhere
Click here to enlarge
Source: Yahoo Finance

At three quarter time going into your retirement, you’re a few thousand ASX200 points short of your retirement needs. Now the question is, were you smart enough to prepare for this situation? Are you going to be able to run out the other team?

Dividends – The Difference You Need in Retirement

The difference between the team that can overrun their opponents and the one that gets overrun is a coach who makes his volunteers victims run around in circles in the pre-season.

Now, the pre-season for no sport on earth should last 6 months, for crying out loud. But the point is the same. If you’ve been diligent and smart in advance, you’ll have a winning strategy that gets you home. Especially when you’re down 3 goals in the last quarter.

So what’s the winning retirement strategy? Here’s a big hint from the dramatically named David M. Blitzer of Standard and Poor’s:

S&P/ASX 200 performance


The blue line is the ordinary ASX200. The red line shows what would’ve happened if you reinvested your dividends. That means you bought more shares each time your shares paid you dividends. The result of doing so is an additional 100% gain on top of the 50% the ASX200 managed over the ten years in the chart.

If you selected your shares more carefully, excluding the companies that pay no dividend, you’d probably be even better off than the red line.

There are two less than obvious factors at play here.

First of all, notice how dividend reinvestors benefit more from upswings in the market. The red line rises in a steeper way than the blue. That means even speculators should be buying dividend shares and reinvesting the cash.

But more importantly for those who are three goals down in the last quarter, dividend shares pay dividends. Ok, so that’s a bad way of putting it. But consider this.

Those who own shares that don’t pay a dividend will have to sell them to generate money for retirement. Those who own dividend paying shares at the point of their retirement can confidently do pretty much nothing. They just bank their dividend cheques.

Just like the Aussie Rules player who was smart before the season, investors who own dividend paying shares will benefit in the last quarter from their wisdom.

Because of all this, we decided to make dividends the feature of our first monthly issue of the Money for Life Letter. Dividends with a twist though. You can watch our video here.

Until next week,

Nickolai Hubble.
Markets and Money Weekend Edition

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Nick Hubble
Nick Hubble is a feature editor of Markets and Money and editor of The Money for Life Letter. Having gained degrees in Finance, Economics and Law from the prestigious Bond University, Nick completed an internship at probably the most famous investment bank in the world, where he discovered what the financial world was really like. He then brought his youthful enthusiasm and energy to Port Phillip Publishing, where, instead of telling everyone about Markets and Money, he started writing for it. To follow Nick's financial world view more closely you can you can subscribe to Markets and Money for free here. If you’re already a Markets and Money subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Markets and Money emails.

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