Australian investors often face the choice between growth shares (companies reinvesting profits to expand rapidly) and dividend shares (companies returning consistent profits to shareholders as cash payments). Neither approach is universally better — they serve different investment goals and have different tax implications in Australia.
What Are Growth Shares?
Growth shares are companies that reinvest most or all of their profits back into the business to fuel expansion. They typically pay little or no dividend — instead, shareholders expect returns through capital growth (the share price rising over time).
Characteristics of growth shares:
- Low or no dividend yield
- Higher earnings growth potential
- Often higher price-to-earnings (P/E) ratios
- More volatile in price during market downturns
Examples on the ASX:
- Xero (XRO) — software, global expansion
- ResMed (RMD) — healthcare technology
- Pro Medicus (PME) — medical imaging software
- Wisetech Global (WTC) — logistics software
Note that “growth” can also refer to growth-style ETFs — such as Vanguard’s Diversified Growth ETF (VDGR) — which hold a higher proportion of shares versus bonds.
What Are Dividend Shares?
Dividend shares are companies that regularly distribute a portion of their profits to shareholders as cash dividends. Many Australian dividend shares pay fully franked dividends — a significant tax advantage for resident investors (see franking credits).
Characteristics of dividend shares:
- Regular income (typically twice per year in Australia)
- Often slower earnings growth
- More mature industries (banks, utilities, consumer staples)
- Often lower volatility than growth shares
Examples on the ASX:
- Commonwealth Bank (CBA) — fully franked dividends
- Wesfarmers (WES) — consistent payer
- Telstra (TLS) — high yield, fully franked
- National Australia Bank (NAB) — regular dividends
Tax Differences Between Growth and Dividend Shares
This is critically important for Australian investors:
Dividend income is taxed as ordinary income in the year it is received (at your marginal tax rate). However, fully franked dividends come with franking credits (the company tax already paid on your behalf) that offset or reduce your income tax.
Capital gains from growth shares are only taxed when you sell. If you hold for more than 12 months, you receive a 50% CGT discount — effectively taxing only half the gain at your marginal rate.
| Tax situation | Dividend income | Capital growth |
|---|---|---|
| When taxed | Year received | Year sold |
| Tax rate | Marginal rate (offset by franking credits) | 50% of marginal rate (if held 12+ months) |
| Best for lower-income investors | ✅ Franking credits can produce tax refunds | — |
| Best for high-income investors | ✅ Franking credits still reduce tax | ✅ CGT discount reduces effective rate |
Dividend Reinvestment Plans (DRPs)
Many dividend-paying companies offer a Dividend Reinvestment Plan — allowing you to receive new shares instead of cash dividends. This is a way to benefit from both approaches: you get the reliable dividends but they are automatically reinvested to compound growth.
Which Is Right for You?
| Investor profile | Likely preference |
|---|---|
| Near retirement, need income | Dividend shares or income ETFs |
| 10+ years to retirement, building wealth | Growth or diversified ETFs (capital growth) |
| Low marginal tax rate | Dividend shares (franking credits may produce refunds) |
| High marginal tax rate | Mix — CGT discount on growth shares is valuable |
| Simplicity preferred | Diversified ETFs (mix of both automatically) |
| Want passive income stream | Dividend shares or dividend ETFs |
A fully diversified ETF like Vanguard Australian Shares ETF (VAS) includes both growth-oriented companies and dividend-payers — you receive the dividends and benefit from overall market growth simultaneously.
Related Articles
- Franking Credits Explained
- Dividend Investing in Australia
- Blue Chip Shares Australia
- Dividend Reinvestment Plans
- ASX Shares hub
- Investing hub
Frequently Asked Questions
Are dividend shares better than growth shares for Australians? There is no universal answer. Dividend shares can be tax-effective for investors who benefit from franking credits (particularly those on lower incomes or in retirement). Growth shares may deliver higher total returns over long periods, but with more volatility and a tax bill only upon sale. Most well-diversified portfolios include both — through a combination of ETFs tracking the broad ASX market.
Do growth shares still pay some dividends? Some do, but at a lower yield. Wesfarmers (WES), for example, is often considered both a quality business with good long-term growth and a reliable dividend payer. The growth/dividend distinction is a spectrum, not a hard binary.
Is it better to focus on yield or total return? For long-term wealth building, total return (capital growth + dividends) is the most important measure. A share paying a 7% dividend yield but falling 5% in price each year has a net total return of only 2%. Focusing solely on yield without considering the underlying business quality can lead to poor outcomes.
This article provides general financial information only. For advice tailored to your situation, speak with a licensed financial adviser. You can find one through the ASIC financial advisers register or MoneySmart.