Dividend-Paying Stocks and Mutual Funds Can Offer Income, Portfolio Growth
By fixating on the ups and downs of stock prices, many investors may be overlooking dividends, which can be one of the most important elements of successful long-term investing.
Simply put, a dividend is a portion of a company’s profit paid out to shareholders. Companies generally pay dividends on a quarterly, semi-annual or annual basis, thereby providing shareholders with a regular income stream.
Dividend-paying stocks – and mutual funds comprised of stocks that pay dividends – also can offer the following benefits:
Solid long-term performance – All stocks have the potential to fluctuate in value. However, dividend-paying stocks — especially companies that have increased their dividends — have performed well over long periods of time relative to non-dividend-paying stocks.1
Provide rising income potential – Dividend payments have the potential to rise as company earnings grow,2 unlike most fixed-income investments, whose interest payments remain static. This “rising income” can help you combat the effects of inflation over time.
Pay less in taxes – Dividends from Canadian corporations are eligible for a dividend tax credit, which can reduce the tax you pay on income from these shares. Interest income, on the other hand, is fully taxable. What’s more, if shares increase in value, the capital gains receive preferential tax treatment. And remember that any dividends accrued inside a Registered Retirement Savings Plan (RRSP) grow tax deferred.
Selecting Dividend-paying Stocks
In choosing dividend stocks, consider focusing on companies capable of generating an uninterrupted stream of dividends, preferably with the potential of increases down the road. As a general rule, these are large companies with good cash flows and a history of rising profits.
Be wary of extremely high dividend yields, however. As a general rule, higher yield means higher risk. During tough economic times, some companies may choose to cut their dividends to remain flexible. Keep in mind that the longevity of any dividend, and the health of the underlying share price, depend on whether the business is sound with good prospects for the future.
Contact your financial advisor soon about the role dividend-paying stocks or dividend-paying mutual funds could play in your portfolio to help you achieve your long-term goals.
1 Past performance is not a guarantee of future results.
2 Dividends can be increased, decreased or totally eliminated at any point without notice.
