The benefits of growing your own dividends

Please note: Fisher Investments Australia doesn’t make individual security recommendations; companies referenced herein are merely examples of a broader theme we wish to highlight.

When Fisher Investments Australia reviews retirees’ hopes and fears, we find a strong proclivity for assets that will generate reliable cash flow—enough to cover living costs. That desire can motivate investors to focus on specific asset categories, e.g., high-dividend stocks, to deliver this income. But there is another way to position for the long-term capital appreciation and cash flow you need: We call it homegrown dividends. Let us show you what they are and how they work.

To start, dispel a common myth: A dividend isn’t free money. Rather, for shareholders receiving a cash dividend, the amount is subtracted from the share’s price: a return of capital, which is paid out of the stock itself. For example, as Exhibit 1 shows, WAM Capital paid a 7.75¢ dividend to shareholders on 21 October 2024, and the stock’s price was adjusted down accordingly, reducing the company’s value.

Exhibit 1: WAM Capital Ltd. October 2024 Dividend

The dividend converts a portion of a shareholders’ stock to cash—it isn’t coming from the company’s coffers to reward owners. The cash paid out was already theirs. Yet financial commentary Fisher Investments Australia reviews treat dividend and non-dividend paying stocks almost like they were separate asset classes. A dividend yield doesn’t make a stock more stable than others, though. Because high-dividend stocks tend to cluster in economically and interest-rate sensitive sectors, they can swing more when it seems times are getting tougher or rate volatility strikes. Companies can also reduce or cut their dividends outright—sometimes when investors may need the cash most, like during an economic downturn.

The crucial point for investors: Dividend income is largely the same as simply selling the equivalent percentage of stock. Yes, there are differences in taxation; Aussies relying on dividends would have to weigh franking credits in determining tax exposure. But selling stocks can give you more control over both the timing of a cash need and the capital gains implications of the sale. It means you can always clip your own coupon when you want. You needn’t wait for a company to declare a dividend or tell you what portion is franked.

When Fisher Investments Australia reviews investing habits, many consider stocks as principal, which they are loath to touch. Dividends may be viewed as external motivation to harvest principal, but once you lift the veil and avail yourself of other withdrawal options, it opens your investment universe. This is another critical mindset shift homegrown dividends provide: Any stock—not just dividend payers—can generate cash flow for you. Stocks may or may not kick off dividends, but they also rise (and occasionally fall) with the market. Homegrown dividends let you convert those price returns into cash flow.

Further, not only do homegrown dividends give you a more flexible withdrawal strategy, but they reorientate your thinking around total return: dividends plus price appreciation. Dividends don’t matter as much as how many you can clip—official or homegrown—over your investment time horizon. Fisher Investments Australia’s reviews of many Tech companies, for instance, find they don’t pay dividends but choose instead to invest in growth or buyback stock. This can reward investors equally or greater, if that investment improves total returns.

Limiting your universe only to dividend payers would blind you to a wider array of stocks with greater opportunity of maximising your investment portfolio’s gains—and likelihood of achieving your financial goals over your lifetime. Everything else equal over the last two decades, a portfolio that didn’t hold any Tech stocks, lacking dividends, would likely be behind one that did.[i] Your total return is ultimately what matters most for your financial wellbeing. Generating cash flow—as homegrown dividends show—is downstream from that.

Homegrown dividends offer other benefits as well. Selectively pruning your portfolio periodically keeps your attention on areas—sector or individual positions—that may have outgrown your intended weight. When Fisher Investments Australia reviews routine portfolio maintenance, trimming outsized exposures lets you reap homegrown dividends whilst paring back risk.

Additionally, homegrown dividends may be more tax efficient even under Australia’s new inflation-adjusted capital gains tax (CGT) regime beginning 1 July 2027. Although the new marginal rate—and 30% floor—on “real” gains could be higher for many than the current 50% CGT discount on ordinary income for assets held more than 12 months, dividends will stay taxed as ordinary income (less any franking credit). That narrows homegrown dividends’ tax advantages, but not completely. Cost-basis indexing can still be attractive when all of a dividend remains taxed and you have the option to try and harvest losses to offset realized gains. Homegrown dividends’ flexibility is a key advantage.

As Fisher Investments Australia reviews withdrawal strategies, cash flow needn’t come from the income your portfolio throws off alone, but its entire appreciation. By focussing on total return, you don’t have to sacrifice growth for desired income.