How to invest for growth and still get good dividends

One of the toughest choices many investors face is between investing for capital growth or for dividends.

Go for growth alone and you may face greater volatility and a lack of income while investing just for dividends may land you with a lot of mature businesses that throw off cash but grow slowly and don’t provide enough capital returns to keep growing your nest egg.

It is particularly a quandary in a market like we have at the moment with the price of gold flying higher but with gold linked ETF shares such as Global X Physical Gold ETF (ASX: GOLD) and BetaShares Gold Bullion ETF (ASX: QAU) not paying any dividends at all.

Ways to avoid the dividend trap

In general, there are two ways of avoiding this investment trap – target companies that have a strong dividend yield but are also still growing strongly or decide to manufacture your own dividends periodically through share sales.

Using the gold example above, if you had invested $10,000 in the Global X Physical Gold ETF (ASX: GOLD) at the start of the year, you would now have around $12,000 worth of shares.

You could now pay yourself a 4% dividend by selling down a part of your shareholding and still have a good exposure to the potentially rising gold price and be sitting on a capital gain as well.

Tailoring your income to specific needs

Alternatively, you could decide that you want to wait until a year is up since purchase so that the capital gains tax concession applies and take your dividend then.

This is the beauty of the self-generated dividend approach – you can tailor your income to suit your particular tax and income needs and you are not locked into certain times of the year when dividends are usually paid.

Taking profits

You can even make a call on your perception of where prices are going, for example, taking profits from your gold holdings after the price has run hard and you are concerned there may be a correction coming.

The real attraction of manufacturing your own dividends though is that it enables you to really broaden the sort of companies you might target and to get a really good mix of growth and yield companies and also commodities like gold and other metals.

There are now even ETFs available to cover the oil price (ASX: OOO BetaShares Crude Oil Index ETF-Currency Hedged (Synthetic) and even carbon credits (ASX: XCO2 VanEck Global Carbon Credits ETF (Synthetic), so there are a lot fewer limits if you can consider the full range of exchange traded products even if they don’t pay dividends at all.

Lower yields with good capital prospects come into play

Even listed investment companies such as Argo (ASX: ARG) that might produce a smaller yield than what you are targeting can be considered if you bring the manufactured dividend into play, particularly when they have a strong record of successful capital gains or retained earnings.

For Australian investors there are also some other considerations to consider given that our dividend imputation system can deliver highly desirable franking credits that can help to offset tax bills or earnings from fully taxable sources such as high interest savings accounts.

By manufacturing your own dividends you can really have the best of both worlds, generating a variable yield according to your requirements at any particular time and picking from a wide range of potential investments including particular commodities whether they already pay a strong dividend or even if they don’t pay a dividend at all.

In this way you can generate both the capital growth and yield that you want over time and even move the target yield up and down as needed.