Every Wednesday, we publish our “Investor Toolkit” series on TSI Network. Whether you’re a beginning or experienced investor, these weekly updates are designed to give you specific investment advice. Each Investor Toolkit update gives you a fundamental piece of strategy, and shows you how you can put it into practice right away.
Today’s tip: “Dividends can produce as much as a third of your total return over long periods.”
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 that 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).
Dividends from Canadian companies come with a tax credit, to reflect corporate income taxes. This cuts your tax rate. (Note: the credit is non-refundable and can only offset income taxes owed. But you can transfer it to your spouse under certain conditions.)
A couple of decades ago, you could assume that dividends would contribute up to a third of your long-term investment returns, even without the tax-cutting effects of the dividend tax credit.
In the early years of the past decade, dividend yields were generally too low to provide a third of investment returns. But since yields have moved up and interest rates remain low, it’s realistic to assume they will again contribute as much as a third of your total return.
Dividends: A Special Report
You can get Pat’s latest advice on how to multiply your profits with dividend stocks. We have just updated and re-released one of our most popular reports: Dividend Paying Stocks: How High Dividend Stocks Can Supercharge Your Income Investing.
In this special report, you’ll find specific recommendations on 5 of Pat’s best buys in dividend stocks, 5 dividend stocks you should avoid, and the smartest way to make use of Dividend Re-Investment Plans. And there’s much more for you as well.
Dividends will help you stay away from the market’s worst stocks
You should also keep these two important points in mind:
Dividends are a sign of investment quality. 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: Dividends are an important contributor to your long-term gains, and dividend-paying stocks tend to expose you to less risk that 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.
Tomorrow…be sure not to miss our report on the credit card company Warren Buffett prefers in “Best U.S. Stocks”.
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