A lot of ‘mum and dad’ investors are sucked into buying traditional dividend shares when it comes to making up the majority of their investment portfolios. After all it’s often thought that dividends are close to guaranteed returns and the tax effective benefits of franking credits are an additional bonus not to be sniffed at. However, unless you’re in the retirement stage of your financial life cycle (i.e you have little to no income coming in other than from investments) I think it would be a mistake to focus on dividend shares if you want to create wealth for yourself…

A lot of ‘mum and dad’ investors are sucked into buying traditional dividend shares when it comes to making up the majority of their investment portfolios. After all it’s often thought that dividends are close to guaranteed returns and the tax effective benefits of franking credits are an additional bonus not to be sniffed at.

However, unless you’re in the retirement stage of your financial life cycle (i.e you have little to no income coming in other than from investments) I think it would be a mistake to focus on dividend shares if you want to create wealth for yourself or family.

After all a company like Amazon has never paid a dividend, but created close to a US$1 trillion in shareholder value in just 22 years.

That’s more than all the companies on the ASX combined and Amazon is just one example of hundreds of the world’s best companies in creating life changing wealth for some long-term investors that pay minimal or no dividends.

Think of other household names like Google, Visa, MasterCard, Apple and Facebook that have created around US$2.7 trillion in shareholder value in around just the last 20 years or so.

Moreover, these companies carry little debt and are reinvesting for more growth, unlike a lot of the dividend favourites on the ASX such as Telstra Corporation Ltd (ASX: TLS) or Transurban Group (ASX: TCL).

Evidently as an investor there’s no doubt that it would be a mistake to chase dividend shares if you don’t need income to meet expenses.

Here are two businesses that don’t pay a dividend, but could absolutely thump the returns of traditional dividend favourites.

Xero Limited (ASX: XRO) is an online accounting software-as-a-service business that has seen its stock price quadruple since lows hit in September 2015. The stock changes hands for $51.32 today and could have room to move far higher over the long term given Xero has a market leading platform in large global markets.

One credible Australian fund manager recently even suggested it could be a $100 billion company one day, compared to today’s $7.3 billion market cap.

This might seem ridiculous but Xero’s growth rates, scarily high gross profit margins, and recurring revenue business model could see it keep going higher even if the $100 billion Xero valuation is hyperbole.

Atlassian is the NASDAQ listed software-as-service business that’s created around A$38 billion in shareholder wealth since its creation in 2002.

In other words it would be among the 10 largest listed companies in Australia despite being just 17 years old and it has never paid a dividend with management on the record as suggesting it’s not likely either given how they Atlassian can reinvest back into the business for more growth.

Readers might say that it’s easy to point out with hindsight the share market’s huge recent winners and what they really need pointed out are the Atlassian or Xero of tomorrow, not today.

However, the best growth companies tend to keep on winning and thinking you’ve ‘missed the boat’ on them can be a far more costly mistake than buying shares for dividends.

After all thinking you missed the boat could lead you to excluding yourself from the best growth shares on the local market.

Motley Fool contributor Tom Richardson owns shares of Xero, Visa, Google, Apple and Amazon.

You can find Tom on Twitter @tommyr345

The Motley Fool Australia owns shares of 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.