Financial Jungle

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Every investor has a style.  I am a dividend-investing fanatic.  Here are my top 10 reasons for dividend investing:

 

 

1)      Dividends set a floor price – Dividend stocks tend to trade within their yield range.  For example, last summer I purchased Bank of Montreal at $60.50 when it was trading near the historical high yield of 4.1%.  The dividends kept the stock from falling more than a couple of bucks before storming back to $71.  BMO also distributed another $1.89 worth of dividend/stock and 2 dividend increases since.

 

2)      Dividends account for over half of the long-term real return – If you own 100 shares of BMO and receive 4% of dividends by year’s end, you can DRIP your dividends to buy another 4 more shares.  If you keep up the DRIP for 20 years, you’ll have a handsome 219 BMO shares in your portfolio.  Even better, some Canadian corporations offer 5% discounts through DRIP.

 

3)      Companies with long-term track records of stable and raising dividends show quality of the managements – Managements show commitment to shareholders by improving fundamentals and sharing profits.

 

4)      Dividends cannot be manipulated like earnings – Dividends are real hard cash in your lap.  Earnings can be faked by creative accounting.

 

5)      A stable stream of dividends reward investors even during market down turn – Management pays you to wait even during market setbacks.

 

6)      Dividends are more tax efficient than regular incomes and capital gains – In British Columbia, you can make $66,000 in dividends and pay no tax.  For regular incomes, you pay $16,880 in taxes.  For capital gains, you pay $5,097.

 

7)      You can safely spend your dividends without harming your portfolio – If you think in terms of income streams instead of portfolio size, you can consume 100% of your dividends without hurting your portfolio.  If instead you go for capital gains, consuming your capital during a depressed market will hurt your portfolio.

 

      Receiving dividends are passive – Dividends and increases are given to you each quarter or year automatically without any action on your part.  On the other hand, to receive capital gains, you must monitor the share prices continuously. 

 

9)      High dividend paying stocks have historically outperformed low-yield stocks – In David Dreman’s Forbes column (April 2004), he cited that between 1970 and 2003, the top fifth highest yield stocks returned 14.5%, while the lowest fifth returned only 8.8%.

 

10)  Dividends are more predictable than capital gains – Suppose BMO averages 10% over the long term with 4% in dividends and 6% in capital gains.  In a given year, you can count on seeing the 4% in your brokerage account, but the 6% capital gain is less dependable.