Are You Looking for Cash Flow from Dividends?

Here is the money you would need to receive $25,000 or $50,000 a year in gross dividends... if you started to invest today. Plus some helpful tips on what to consider before you jump right in and buy shares to chase a dividend.

(The following content is not a personal recommendation to buy any of the following companies as I am not taking your personal financial situation into account.)

Now, before you skip ahead or jump to conclusions, please read the entire post so I can explain some important points.

I’m going to use the example of BHP. A very common ASX listed company that self funded retiree investors like to buy for the dividend.

Note: Buying an ASX commodity based company purely for a higher than average dividend could be a mistake. So it’s important that you understand cyclical businesses and non cyclical businesses that pay dividends.

  • To earn $50k of gross dividend income from owning BHP today, you’ll need to invest $488,376.00.
  • To earn $25k of gross income from owning BHP today, you’ll need to invest $244,188.00.

*Individual tax circumstances will vary, so I am using gross numbers for this post.

Aussies have a strong fascination with dividends. And many investors don’t take into consideration the potential loss of capital when investing in a cyclical, commodity based company for a dividend.

I am not saying BHP is a lousy investment. Far from it. But please consider the following if you are a new investor.

Over the past 12 years, BHP’s dividend has risen from $1 per share to $4.63. At a quick glance, this seems very impressive.

But what many investors fail to take into consideration, is that in 2016 BHP’s dividend fell from $1.60 per share to 0.39c per share as the price of Iron Ore fell from $188 per tonne to $40 per tonne.

If you were unlucky enough to buy BHP shares in early 2011 the capital gain on your investment would be close to zero after 12 years. That’s because the share price in early 2011 was $43 and today the share price is only marginally higher at $45.33.

It doesn’t appear such an exciting investment when I tell you that. Particularly when you consider that if you had your money in a non cyclical business like Costco or Microsoft, your capital (initial investment) would have grown by over 1000% plus the dividends.

What concerns me is that many baby boomer investors who are retiring now don’t appreciate how important it is to protect the capital they’ve worked their entire life for.

For example, if you bought BHP in 2011 for $43, by 2016 the BHP share price was $15. That means $100,000 invested would be worth $35,000.

You would have lost 2/3’s of your capital.

I can guarantee you that if your attention was on dividend income and not capital protection in 2011, it certainly was by 2016.

The average investor would sell when they saw their investment half in value and they would lock in a major loss and likely walk away saying things like. “Don’t touch the stock market, it will take your money.”

Sad but true.

All they needed was some education about cyclical companies and when to avoid buying them.

For the past 20 years BHP’s share price has fluctuated with the price of Iron Ore.

  • Its share price has traded from $15 in 2005 to $47 in 2008.
  • Back to $20 in 2009, then to $45 in 2011.
  • Down to $15 in 2016 and now back to $43.

BHP is close to the top of a 20 year trading range and commodity prices don’t go higher and higher and higher. They are cyclical by nature and rise and fall.

And so does the share price of companies directly related. Just look at any commodity price over the past 25 years.

The fascination investors have with dividends will lead to many self funded retirees in Australia buying a company like BHP at a cyclical price high, only to see the price of Iron Ore fall, as it will at some point.

And their invested capital (life savings) halves or perhaps worse.

Their immediate focus was on the dividend, giving no thought to what they would do if their money halved in value… which it likely will at some point if they own a commodity based company.

This is why I personally won’t invest in commodity companies. Instead, I prefer to invest in non cyclical companies.

You may find it interesting to know that the top super investors of all time rarely ever had a commodity based company in their portfolios.

If you only want the dividends and don’t care about initial capital, (silly option in my view), then buying ASX commodity based companies will give you some decent cash flow.

But if you are like me, and you care about the initial capital you invest and would like to see this grow, then you should consider investing in high quality non cyclical companies that pay handsome, growing dividends. And your capital is not at the same risk of declining.

The ideal time to buy shares in cyclical commodity based companies is when commodity prices are at cyclical lows. Like Iron Ore was in 2016.

If you’d invested in BHP in 2016 when the price of Iron Ore was at a multi year low, your initial capital 7 years later would have grown by well over 100% plus the dividends. Now that’s exciting investing.

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