If you’ve ever wondered “what are dividend stocks?” We have the answer for you.
Dividends are typically cash payouts that serve as a way for companies to share the wealth they’ve accumulated through their operations. These payouts are drawn from earnings and paid to the shareholders of the company. Commonly these dividends are paid quarterly, although they may be paid annually or even monthly as well.
Dividends can produce as much as a quarter of your total return over long periods.
What are dividend stocks good for?
Dividend stocks rarely get the respect they deserve, especially from beginning investors. That’s because a yearly 2% or 3% or 5% dividend barely seems worth mentioning alongside possible yearly capital gains of 10%, 20% or 30% or more.
But dividends are far more reliable than capital gains. A stock that pays a $1 dividend this year will probably do the same next year. (It may even raise the rate to $1.02).
What are Dividend Stocks?
Canadian taxpayers who hold Canadian dividend stocks get an additional bonus. Their dividends can be eligible for the dividend tax credit in Canada. This means that dividend income will be taxed at a lower rate than the same amount of interest income (investors in the highest tax bracket pay tax of around 34% on dividends, compared to 50% on interest income). Investors in the higher tax bracket pay tax on capital gains at a rate of 25%.
A couple of decades ago, you could assume that dividends would supply up to about one-third of the stock market’s total return. Due to the rise in stock prices since the 2008/2009 downturn, dividend yields are lower than they used to be. But it’s still safe to assume that dividends will supply perhaps a quarter of the market’s total return over the next few decades. That’s a major tax-deferral opportunity, even though taxes on dividends are lower than on interest.
When you add in the security of stocks that have dividend records going back many years or decades, and include the potential for tax-advantaged capital gains as well as dividend income, Canadian dividend stocks are an attractive way to increase profit with the least amount of time.
Ultimately, dividend stocks are good for cutting tax rates and making the investors more money.
The Power of Dividends
Dividends are more important than ever. Today’s low interest rates prompt more investors to look to dividend stocks for income. And dividend stocks are a source of strength in volatile markets, so many companies are raising their payouts. This is the time to build more strength into your portfolio with Pat McKeough’s “How High Dividend Stocks Can Supercharge Your Income Investing.”
What are dividend stocks good for? Dividends will help you stay away from the market’s worst stocks.
Some good companies reinvest profit instead of paying dividends. But fraudulent and failing companies hardly ever pay dividends. So if you only buy stocks that pay dividends, you’ll automatically stay out of almost all the market’s worst stocks.
Dividends can grow
Stock prices rise and fall, so capital losses often follow capital gains, at least temporarily. Interest on a bond or GIC holds steady, at best. But companies like to ratchet their dividends upward — hold them steady in a bad year, raise them in a good one. That gives you a hedge against inflation.
For a true measure of stability, focus on companies that have maintained or raised their dividends during recessions and stock market downturns. These firms leave themselves enough room to handle periods of earnings volatility. By continually rewarding investors, and retaining enough cash to finance their businesses, they provide an attractive mix of safety, income and growth.
Our investment advice for dividend stocks
Dividends are an important contributor to your long-term gains, and dividend-paying stocks tend to expose you to less risk than non-dividend-payers. That’s why the majority of your stocks should be dividend-payers at all times. As you get older and closer to retirement, you should raise the proportion of dividend-paying stocks in your portfolio, to cut risk and improve the stability of your investment results.
In summary, dividend stocks can lead you to better investment returns and tax advantages.
How focused have you been on investing in dividend-paying stocks?