Picking an investment strategy depends on your life stage, income needs and tax factors
When considering a strategy for investing in shares, a good question to consider is do you prefer generating steady income, or pursuing long-term growth?
Your answer will more than likely determine whether you focus on dividends or growth, two different approaches that come with pros and cons.
Explaining the differences
Some companies distribute part of their earnings to shareholders, usually as cash payments. These dividend payments are typically issued quarterly, half-yearly or yearly. The big attraction is that these payments can provide a steady stream of income, on top of any ongoing stock price rises. However, dividend payments are not guaranteed and can vary depending on company performance.
Companies that pay dividends are often more mature. For example, many ASX-listed companies, including big banks and resources companies, commonly pay dividends. While they may offer income, their share prices can still fluctuate, and investors may be exposed to market volatility.
Growth-oriented companies tend to prioritise investing in their business rather than paying higher dividends. This may support long-term capital growth over time and the benefits of compounding. However, these investments can be more volatile, and returns can be less predictable, especially over shorter timeframes.
Life stage matters
Different investment approaches are associated with different life stages. Investors in their 20s to 30s with longer time horizons may place greater emphasis on growth and have time to ride out market volatility. Those approaching retirement may place more emphasis on generating regular income, to support their cash flow needs.
What about taxes?
Dividends are generally subject to tax in the year they are received, while capital gains from growth investments are usually deferred until the shares are sold. For Australian investors, franking credits, a tax credit system that prevents company profits from being taxed twice, can improve after-tax outcomes for some dividend-paying investments.
Tax rules can change over time, and recent Budget announcements have proposed updates to how some investment gains may be taxed, although these changes are not yet finalised.
Blending income with growth
Some investors choose a blend of dividend and growth stocks as part of a diversified portfolio, with extra weighting for one or the other.
Exchange-traded funds (ETFs) can provide exposure to a range of investment approaches, including income-focused, growth-oriented or diversified strategies, depending on the fund. For example, broad market index tracking ETFs can include a range of companies with both income and growth characteristics. As with all investments, ETFs carry risk and returns are not guaranteed.
Given the complexities and the range of considerations, many investors seek advice from a trusted accountant or you can contact us, to determine an approach that aligns with their circumstances.
Important Information:
Actual results could differ materially from those referred to in this article. In particular, distributions and capital growth are not guaranteed. An investment in equities and/or ETFs are subject to investment and other known and unknown risks, some of which are beyond the control of Vanguard, including possible delays in repayment and loss of income and principal invested. Neither Vanguard Investments Australia Ltd (ABN 72 072 881 086 AFSL 227263) nor its related entities, directors or officers give any guarantee as to the success of the investment, amount or timing of distributions, capital growth or taxation consequences of investing in equities and/or ETFs.
Source: Vanguard
Reproduced with permission of Vanguard Investments Australia Ltd
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