While there are a range of different options for income-seeking investors, the Plato team believes the long-term benefits of dividend income investing can provide a superior solution, particularly for pension-phase investors who rely on income from their capital to make ends meet.
To demonstrate the benefits of dividend income, I often use a personal case study – the financial history of my parents’ retirement.
They retired in 1980 and the chart below highlights the amount of income they could have received from the two main asset classes available – cash in the bank, or dividends.
The chart shows $100,000 invested at the start of 1980 and the resulting return if you had:
- Put $100,000 in the bank and calculated the amount of interest received each year.
- Put $100,000 into the All Ordinaries index , and subsequently S&P 300, and tracked the amount of income received from dividends and franking credits.
You can see that in the 80s interest rates were very high and in the first six or seven years my parents got more bank interest than they did dividends. However, once franking came in during the late 80s you actually got more dividend income from shares.
Now, because my parents were retired, they lived off that dividend income, so the chart factors in the fact that none of those dividends were reinvested. Normally when you see an accumulated chart of this nature it accumulates to a very high amount. But if you’re retired, you’re living off that income so the chart demonstrates what would have occurred in the case of a retiree who uses their income to pay bills and take holidays.
Had my parents invested in cash in 1980, in the 90s they would have hit a stage where they simply would not have been able to make ends meet from interest income. In fact, up until very recently, interest income fell for three decades.
On the other hand, you can see income generated from a portfolio of Australian shares is now approximately $70,000. Sure, there are some ups and downs. Dividends did fall in the recession we had to have in the early 90s, dividends fell during the GFC, and again in the pandemic year, but they have continued to grow outside of that period.
This is one reason to consider dividend income – equities tend to grow over time, profits grow and dividends grow. Even without reinvesting any money, you can get an increasing dividend stream over time.
So, you can see my parents were much better off having invested in the share market than living off the interest from a bank account with the same initial investment.
Of course there are risks to consider and we believe active and tax-effective portfolio management is key, but like my parents, dividend income can be a great solution for retirees today.
Read next: What are Franking Credits?
Discover more about investing in the Plato Australian Shares Income Fund here.
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