To measure the performance of each market sector indices are used.The range of indices includes the S&P/ASX200 and is used as a barometer for investor sentiment. For example companies such as AGL Energy, Commonwealth Bank of Australia, Ramsay Health Care & Toll Holdings are included. The All Ordinaries or XOA comprises 95% of 500 the largest securities listed on the ASX and is often used as a benchmark for investors.
The remaining 5% are referred to as penny dreadfuls and are traded by speculators usually from the resource sector and are not included.
I am going to use the S&P/ASX Net Total Return or the ASX200 Accumulation Index as my benchmark because my strategy is to reinvest the dividends from my shares back into buying more shares in my portfolio and take advantage of compounding. It works like this;
Rise or growth in original investment includes;
(a) The return on share prices alone, and
(b) Share prices and dividends reinvested-accumulation.
Dividend yield-based strategies, which focus on both income and capital appreciation, have proven to produce stable income streams and provide protection during market downturns.
Total returns are important as they will give me the true indication of my performance and if I’m on track to achieving my financial goals. Table 1 shows the returns on investment if you had of invested in the ASX200 Accumulation Index. I need to do better than this. Annualized - a fancy term for a return on investment!
ASX Accumulation Index Returns -Table 1.
With dividends reinvested the value of your initial investment trebles, then 18 times then 69 times.Warren Buffett reinvested all dividends back into to buy more shares and his company did not pay dividends for over 50 years. He told his shareholders if they wanted dividends to sell some of their shares. When you buy shares you select what you wish to do with your dividends.
Most listed companies operate a DRP - Dividend Reinvestment Program.
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