Making your money work harder

Everyone wants their money to work hard and their investments to get the best returns, but what does this really mean?

For many it is receiving the best interest rate available in a term deposit while for others it could be picking the best performing shares in the stock market.

In my world, getting the best return on investment involves two important elements – capital growth and income generation. Simply put, capital growth is the increase of value of an investment over time and income can be received in the form of rent (property), dividends (shares) interest (term deposits) to name a few examples. Many investors are unaware that these characteristics are not the same thing, and when combined well can significantly change your rate of return.

The concept of capital growth can be applied to any asset you buy and in the case of shares, you purchase a share at a given price and the value fluctuates over time.

If the share price is higher when you sell the share, then you have experienced capital growth – the difference between the purchase price and the sale price is called a capital gain.

Determining the income return on the same share purchase can be a little more complex as it is largely dependent on the timing of the purchase and the underlying business. For example banking shares typically pay higher dividends than mining shares.

As a rule, the majority of Australian companies pay a dividend twice a year, an interim dividend and a final dividend which make up the quoted dividend yield for a particular company.

Dividends are a source of income that is generated regardless of the underlying price of the share. This means that even if the price of the share you chose is lower than when you purchased it, you will still receive the dividend income when it is payable.

The key to achieving the best returns is learning to purchase shares at an optimal time to benefit from both the capital growth and dividend income, and then rolling into the next best opportunity to start the process again. This is not a difficult exercise and when managed correctly, it can dramatically increase the rate of return on your investments while generating a constant and reliable income stream.