Sunday, June 20, 2010

Dividends vital in boosting returns on equities

The returns you earn from long-term investments in the share market are influenced by three factors, but of the three the compounding effect of the reinvestment of the dividends you earn is the most important, two asset managers say.

While you, or your asset manager, can boost your returns by looking for undervalued shares and those likely to show good growth in earnings (profits) - the two other factors that influence your returns - your best bet is to seek out shares able to pay good sustainable dividends or a fund manager who will do it for you, research by asset managers shows.

Your returns on your equity investments are made up of the dividends you earn from the shares and the change in the share price.

Asset managers say the change in the price of a share is the result of growth in the listed company's earnings (its taxed profits) and the change in the way the market values those earnings. The way the market values earnings is measured by the price-to-earnings (PE) ratio - the price of the share divided by the company's earnings per share.

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