It seems that almost every day another article is published in the media or on a blog about the benefits of dividends. You can’t blame investors for looking for income with fixed income products in 2012 providing negative real returns (after taxes & inflation).
Today I’ve got 10 reasons of why you should own some dividends in your portfolio…
Income from employment (active income) means you have to work for your money. Dividends are passive; they are paid to you on time regardless of where you are, what you are doing or how much time you put into researching an investment. Most companies pay their dividends quarterly (four times each year) as an incentive for you, the shareholder, to invest capital into their business. It’s one of the most effective shareholder retention practices in business!
In Canada dividends are taxed differently than employment income, interest or capital gains. The dividend tax credit is an incentive for investors to invest in dividends. The extent of the credit depends on your annual income of course. For an individual who made $45,000 in Ontario in 2011 their marginal tax rate would be 31.2%, capital gains would be taxed at 15.6% and Canadian dividends at 13.4%.
Dividends, historically, are raised once a year by dividend achievers at a rate that exceed the annual rise of inflation. For an investor looking to create a tax efficient income stream for retirement dividends are ideal because they help you preserve your purchasing power as the costs of goods and services rise.
Companies that pay a dividend tend to be companies with a stable cashflow and profitable business model. They often have predictable operations, products or services in demand and may have a long history of paying out dividends to investors.
Companies that pay you a dividend will announce the date of each payment of your dividend. These companies will also announce their ex-dividend date so you know when you need to make a purchase of the stock to be eligible for the next dividend payment. There is no better feeling than knowing when you are expected to be paid and seeing your dividend deposited into your investment account on time!
Reduced Trading Costs
A dividend strategy inherently comes with less trading costs than other investment strategies. Dividend paying companies are generally held for long periods of time and investors who embrace a dividend growth strategy may only incur trading costs when they add to their specific investments or sell in order to readjust their portfolio allocations. With dividend investing you only need to sell when necessary. DRIPs (see below) make dividend investing even more affordable.
Ease of Investing
Constructing a portfolio of dividends is fairly easy to do. You pick a few companies from different industries, buy them when they are affordable or of value and when you have a decent number of companies (12-25) you only need to make adjustments to your portfolio allocation when necessary. Dividend paying stocks can be easily found on the New York Stock Exchange (NYSE), Dow Jones Industrial Average, Nasdaq, Toronto Stock Exchange (TSE) and global stock exchanges.
Reinvesting Dividends (DRIPs)
DRIPs (dividend reinvesting plans) are very attractive to dividend investors. These plans operated by some companies who pay dividends allow you to automatically reinvest your dividends paid throughout the year back into more shares of the same company. By setting this up with the company or your broker you won’t incur any additional trading costs!
Dividend investing, when used properly, is a fantastic retirement strategy by helping you build a tax efficient income stream that grows each year. Starting with only a few thousand dollars in your 20’s and adding to that portfolio over time may allow you to retire much earlier than you planned!
Dividend investing has been success for a very long time! You do need patience, skill, discipline and time for a dividend portfolio to grow properly, but for most investors it is an investing strategy you can take pride in by doing on your own.
When you consider these 10 Reasons To Own Dividend Paying Stocks it’s not different to see the advantages of dividends versus the use of an investment advisor. When you consider that 2% in fees paid to mutual funds or an advisor over 10 years leaves you with 20% less capital the decision to invest in dividends is pretty clear!