Dividend-paying stocks can provide a double-edged advantage to your investment portfolio: potential for market growth and a portion of the company’s profits.
Stocks that offer dividends tend to come from large, stable companies that are usually solid investment choices in their own right. But when you add the dividend—a regular payment to shareholders—it’s easy to see why dividend-earning stocks fit into so many investors’ portfolios.
Companies like Walmart, financial institutions and utilities and infrastructure suppliers like CP Rail are all examples of dividend-generating stocks. These stocks tend to be less volatile, and have more even and steady growth. And dividends don’t tend to be tied to market downturns, meaning a decrease in the stock price may not have any impact on the dividend that you receive.
One of the interesting advantages of dividend-generating stocks is the reinvestment option. Investors can use the dividends they receive to buy more of the stock—essentially increasing their overall position in that stock. Obviously, with steady dividends, and steady reinvestment, your overall investment can greatly increase over time with this approach.
Of course, the other advantage of dividend-generating stocks is that dividends can provide a steady stream of income. In retirement (or even before) you may choose to take the dividend as cash, leaving the principal investment untouched so that it can continue to grow. This is particularly helpful when stock markets are down—if you don’t have to touch the principal, your investment has the chance to recover to its earlier state.
The following shows the impact of reinvesting dividends. The orange line depicts the TSX return without dividends reinvested. The blue line depicts the TSX total return, which includes the value of reinvested dividends.
Dividend paying companies can be compared to a rental property. If the rental property goes up in value, you still receive rent. If the rental property decreases in value, you still receive the same rent. In this hypothetical example, the property provides a regular monthly rental income of $1500 despite the fact that the value of the property itself decreased from $400,000 to $320,000.
Dividends can be a beneficial part of your financial plan. Talk to an experienced certified financial planner to determine if this solution is right for you.