The Case for Dividends

By Robb Lovell, MBA

Dividend stocks and funds are always an important part of any conservative portfolio.  But especially right now as we face markets that are relatively flat along with interest rates which are quite low, dividends can become an important and consistent source of returns in a portfolio.



Dividends are a cash payment to shareholders; these are most often paid on a quarterly basis.  These dividends are paid regardless if the stock is held as an individual holding or as part of a mutual or segregated fund.



Dividend stocks and funds offer important consistent return on an investment in times like now where markets are flat.

It’s important to include dividend stocks and funds in a portfolio as they offer numerous advantages including:



Attractive Returns:   Dividends paid are part of the total return on a stock or fund.  Companies that pay dividends are usually historically stable.



Less Volatility:   Dividends help lessen the potential fall in a company’s stock price, thereby reducing volatility.

Increased Yield:   Dividends provide consistent income and are a small but important part of an investment’s total return.



Favourable Tax Treatment:  Canadian dividends receive a more favourable tax treatment than interest income which is taxed at your full marginal tax rates.

With most funds like segregated funds, dividends are reinvested back into the fund allowing investors to reinvest their dividend earnings.



 

Consider this, companies that have a dividend policy must manage their cash flow more effectively and consistently to maintain the outflow of dividends.

These types of companies tend to be more conservative in nature and this fact pays off for investors via consistent income from dividends combined with long term growth potential from growth earnings.

We know the importance of dividends in a portfolio and especially now that this consistent return is even more important for investors to maintain a reasonable rate of return.