Dividend paying stocks add stability and investment quality to your portfolio. And dividends account for a lot–maybe as much as a third to a half–of your total returns.
Many investors are surprised to learn that over the course of an investing career, dividends may supply more than a third and as much as a half of their total return. After all, companies with stocks that pay dividends generally try to keep paying them every year, regardless of what goes on in the stock market. Then too, over long periods, dividends have a way of rising.
In addition to the obvious benefit of current income, dividends offer an extra plus. They act somewhat like a character reference for companies that pay them. It’s true that many mediocre companies pay regular dividends. It’s also true that some of the market’s worst disasters were long-time dividend paying stocks that kept on paying dividends until they had lost a great deal of their value.
Dividend paying stocks are better performers
However, if you divide all stocks into two groups—those that regularly pay dividends and those that don’t—you’ll find far more stability and investment quality among the stocks that pay dividends than the non-payers.
We suspect, too, that dividend paying stocks will provide you with better performance, along with less uncertainty, over a lifetime of investing. When we speak with experienced stock investors who have enjoyed investment success over long periods, they invariably seem to concentrate their holdings in stocks that pay dividends.
Dividend funds are less volatile
There’s a lesson in this not just for stock investors but mutual fund investors too. If the volatility of your current equity funds has been hard on your nerves in recent months, then an equity fund that places a greater emphasis on dividends may be just what you need.
The obvious choice here is a dividend fund that concentrates on high-yielding common shares. These funds are, in fact, ultra-large-cap equity funds. And they have a significant advantage over other stock funds—even index funds. They enjoy equity-like returns with below-average volatility. One good example is Scotia Canadian Dividend Fund.
The MoneyLetter, MPL Communications Inc.
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