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5 Reasons Why Dividends Are My New Best Friend

May 14, 2014

The gift that keeps on giving. No strings attached. dividends bagYou can’t touch them or feel them like a new cashmere sweater but they sneak up on you (in a very good way).

I didn’t see it coming. As I near retirement, I realize just how important dividends are to my financial security. They are definitely one of my new best friends.

Sure, you have to shell out some money first to buy the company’s shares. But once you do, you can sit back, relax and watch your dividends flow in. Regardless of whether you’re 18 or 88, dividend-paying shares are a wonderful component of a well-diversified investment portfolio.

Here are five reasons why every girl (or guy) should own some dividend-paying stocks.

1. Dividends are an indicator of strong, mature, high quality companies– Many dividend-paying companies have a long history of growth, profitability and strong brands. Their products often stand the test of time. Banks, utilities, pipelines and consumer staples companies are prime examples. Several of these companies have share prices that are less volatile and hold up better in recessions. All of these factors, taken together, make for a great long term investment.

2. Dividends help to preserve/grow your capital- The nice thing about dividends is they reduce your reliance on share price growth. Therefore, you are less likely to panic when stock prices decline or sell at the wrong time. Several studies show that dividend-paying stocks, especially dividend-growers, have outperformed non dividend-payers over the long term. Other research shows that dividends account for a large portion of the stock market’s total return over the long run.

3. Dividends are a great source of passive income– If you like the idea of “easy money”, dividends fit the bill. Unlike earning your pay check, you DO NOTHING and they keep rolling in. In tough economic times, some companies cut their dividend payouts however this remains more the exception rather than the rule.

4. Dividends offer inflation protection– Profitable, well-managed companies often increase their dividends over time. This protects you from inflation that can destroy your wealth, especially once you’re retired or living on a fixed income.

5. Dividends are taxed more favourably
With dividends, you keep more of your money after tax compared with other sources of income like salary or interest. Many Canadians are not aware of how substantial this difference is. For example, an Ontario resident with $75,000 of taxable income will pay almost 33% tax on each extra dollar of interest vs. only 14% on Canadian dividends. That’s a lot of extra money in your pocket- almost $19 for every $100 of dividends received vs. interest. These tax savings can more than compensate you for the additional risk associated with equity investments.

Not convinced? Want more information?

Here are two articles from excellent, independent sources for learning more about dividend investing:

Investor Education’s website GetSmarterAboutMoney.ca- How Stocks Work

Globe and Mail’s Investor website- Dividend Investing Works: Here’s The Proof 

Photo courtesy of thebluntbeancounter.com

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One Comment
  1. Some very good info on dividends. If you want more, check out http://www.stockcents.wordpress.com

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