I think that high-yield dividend shares can be detrimental to building your wealth, particularly if you choose the wrong ones.

Reason 1: Tax

Taxes are the subscription fee for being part of a good society, but you don’t need to be handing over extra when you don’t need to.

Unless you’re in a low tax bracket (such as within superannuation or a low income earner), any dividends you receive may be taxed at around a third or even more.

If you get a sustainable 10% return from a high-yield dividend share then you could be handing over a third of it to the tax man each year. Compare that to a 10% capital growth from something like Xero Limited (ASX: XRO) or A2 Milk Company Ltd (ASX: A2M) – you don’t pay any tax unless you actually sell the share. I think it makes a big difference over time.

Obviously there’s the benefit of dividend franking credits which reduces your taxes owed, but you still have to make up the extra tax unless you’re in that lower tax bracket position where the franking credit rate is higher than your tax rate.

Sometimes paying the tax can be worth it if you just want a high net yield from your investments and you can find a reliable dividend payer.

Reason 2: It may be a bad investment

Having a high-yield dividend share shouldn’t mean you overlook all the other areas of a business. Does it have a good balance sheet? Is there good prospects for the business and its industry as a whole?

A high yield may mean little growth, which suggests the business could be mature or challenged.

If it’s a bad investment then you could easily suffer wealth destruction from falling earnings and a falling share price. And the dividend could be cut. There’s not much point going for the big dividend if the dividend is then cut a year or two later.

Just look what has happened to Telstra Corporation Ltd (ASX: TLS) and National Australia Bank Ltd (ASX: NAB). Lower share prices and lower dividends compared to a few years ago. Over time it’s the ‘growth’ businesses that will keep paying larger dividends so you can receive a good yield on cost. Plenty of high yield dividend shares are actually yield traps, particularly in these coronavirus times. 

What high yield dividend shares are worth buying?

It depends how high of a yield you want to go and if you don’t mind paying the elevated levels of tax.

Rural Funds Group (ASX: RFF) has a FY21 distribution yield of 5.9%.

Brickworks Limited (ASX: BKW) has a grossed-up dividend yield of 6.3%.

WAM Microcap Limited (ASX: WMI) has a grossed-up dividend yield of 7.4%.

Future Generation Investment Company Ltd (ASX: FGX) has a grossed-up dividend yield of 7.9%.

WAM Research Limited (ASX: WAX) has a grossed-up dividend yield of 10.9%.

Naos Emerging Opportunities Company Ltd (ASX: NCC) has a grossed-up dividend yield of 13.25%.

At the current prices I’d probably be happy to go for WAM Microcap, Brickworks and Future Generation as my preferred three high yield dividend share picks because the yields aren’t too high. But all of them could be good long-term picks for dividends.

More reading

• Is it time to buy ASX small caps for your portfolio?
• 3 must-read investing books for new investors
• UBS picks the real ASX winners from the COVID-19 grocery boom
• ASX 200 sinks 1.3%: Big four banks drag ASX lower & Altium issues sales warning
• These were the top 10 ASX 200 shares over the last year

Motley Fool contributor Tristan Harrison owns shares of FUTURE GEN FPO, RURALFUNDS STAPLED, and WAM MICRO FPO. The Motley Fool Australia owns shares of and has recommended Brickworks, RURALFUNDS STAPLED, and Telstra Limited. The Motley Fool Australia owns shares of A2 Milk and Xero. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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Paying off a mortgage is one of the primary financial goals many Australians have – if not the sole one.

A home is often a family’s largest asset, so paying off the mortgage is a big step towards financial freedom and living a comfortable retirement.

Unfortunately, it remains a massive task to accomplish – even with interest rates at their lowest levels in history.

So here are three tips for paying off your mortgage faster, so you can spend your hard-earned money on more important things!

Get a better rate

Even though interest rates are close to zero, many banks haven’t fully passed on these cuts. That’s why (if you haven’t already), you should pick up the phone today and ask Commonwealth Bank of Australia (ASX: CBA), or whichever bank you have your loan through, if you’re getting the lowest rate you can. Even shaving 0.2% off your mortgage rate can save you thousands of dollars over the lifespan of the loan.

Who would you rather have that extra dough – you, or your bank? Exactly!

Pay more than the minimum repayments

A principal-and-interest loan sees interest-dominated repayments required at the start of the loan, which taper over time as you pay off more of the principal. That’s why making extra repayments on top of the minimum amount required can dramatically shave off years (and interest charges) from your loan. It can also help protect you from the possibility of higher interest rates down the road.

If you’re in your first year of a 25-year mortgage, every extra $100 you pay is $100 you won’t pay interest on for 25 years. How’s that for a return?!

Invest alongside your loan

Many people save investing for when the mortgage is paid off, but there’s a better way to do it if you’re careful.

Say you have an interest rate of 2.5% on your mortgage. If you invest in an ASX dividend share that pays you 4% a year in dividends, you can use this extra passive income to help you make additional payments down the road, all whilst holding an income-producing asset.

Of course, this option isn’t for the faint of heart, as ASX investments can fluctuate wildly in value and some won’t always pay consistent dividends. But if used prudently, I think this is a path anyone with a mortgage can use to their advantage.

More reading

• Meet the growing ASX large cap that’s beating the COVID-19 slowdown
• 3 ASX dividend kings to buy and hold forever
• ASX 200 sinks 1.3%: Big four banks drag ASX lower & Altium issues sales warning
• Reality bites: Broker warns CBA shares to underperform this week
• 3 ASX 200 shares to watch this week

Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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I’ve been keeping a close eye on what substantial shareholders have been doing recently.

Substantial shareholders are shareholders that hold 5% or more of a company’s shares. These tend to be large investors, asset managers, and investment funds. These shareholders are obliged to update the market when they make any changes to their holdings.

As a result, I feel investors should look to use these notices to their advantage. After all, they show where the smart money is going.

Two notices that have caught my eye are summarised below:

Marley Spoon AG (ASX: MMM)

According to a change of interests of substantial holder notice, Perennial Value Management has been increasing its stake in this meal kit delivery company. The notice reveals that over the last four weeks the fund manager has picked up just over 2 million Marley Spoon shares. This has increased its holding in the company to approximately 12.5 million shares, which is the equivalent of a 7.88% stake.

Marley Spoon is being seen as a big winner from the pandemic due to more eating at home. This has led to a surge in demand for its meal kit subscriptions, sending its shares hurtling higher. Since this time in March, Marley Spoon’s shares have climbed 400%. This fund manager appears to believe its shares can continue climbing higher.

Monash IVF Group Ltd (ASX: MVF)

A notice of initial substantial holder reveals that Challenger Ltd (ASX: CGF) has been buying this fertility treatment company’s shares. Over the last six weeks the annuities company has picked up 20,687,831 shares in Monash IVF. This represents a 5.74% stake in the company.

Challenger may believe that recent share price weakness is a buying opportunity now that lockdowns are easing and fertility treatment services are up and running again. The Monash IVF share price is down 60% from its 52-week high.

More reading

• Is it time to invest in shares or wait on the sidelines?
• ASX shares and investing trends that could boom post COVID-19
• How to build your first ASX share portfolio
• Why this ASX small-cap share should be on everyone’s watchlist
• Is the Challenger share price a buy for the 11% dividend yield?

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Challenger Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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