Clark Wealth Management Group - ScotiaMcLeod Fredericton

If the past several of years have taught investors anything it’s that we need to take sensible precautions to earn solid returns without inviting excess risk and volatility.

Today we’re going to look at why people should be considering “dividend paying” investments and what to keep in mind as you do.

Here are four reasons to want them:
1. Dividends have the potential to enhance your rate of growth. Everyone knows that higher is better than lower when it comes to rates of return. Most investments are either ‘growth’ oriented or ‘income’ oriented investments. Most dividend paying investments are both. For example, if you wanted to earn 7% on your investment and you bought common shares in BCE Inc, your annual return just from the dividend alone would be roughly 4.85%. That means the value of the shares would need only to increase in value 2.15% or about $0.91 cents per share to get to the total return of 7%.
2. Dividends have the potential to increase your level of income. Traditional income oriented investments such as GICs and bonds are producing extremely low rates of return at present. Given the economic challenges faced throughout the developed world, it’s unlikely interest rates will rise anytime soon. For example, if you were to invest your money in a five year GIC at Royal Bank today their posted rate is 1.85% annually for the next five years. If instead you were to buy dividend paying common shares in the Royal Bank you would receive an annual dividend of 4.11%. Unlike the GIC however, in the case of the shares, you have to be prepared to tolerate some price swings and the lack of a guarantee of your capital.
3. Dividends have the potential to reduce volatility (price swings) of your portfolio. When comparing dividend paying stocks to non-dividend-paying stocks the dividend payers have an advantage. The income from dividend paying stocks gives them an intrinsic value. All else being equal, if the price of a dividend paying stock falls the dividend yield rises, attracting new buyers and supporting the price.
4. Dividend income gets special tax treatment. When investing outside of an RRSP, RRIF or Tax-Free-Savings account interest income earned is taxed like employment income at your highest marginal tax rate. Eligible dividend income on the other hand attracts the dividend tax credit which results in a preferred tax rate being paid. For example at the highest marginal rate (2011) in New Brunswick if you were to earn $1,000 of interest you would keep $567 after tax. If the $1,000 was earned as eligible dividends you would keep $790 after tax. That’s a 39% after tax pay increase. Pretty attractive!

Keep these things in mind. All dividend paying investments are not created equal. It’s critically important to be selective and choose those high quality investments least likely to disappoint.

Secondly, dividend mutual funds rarely pay a regular quarterly or monthly dividend to investors.  Notable exceptions are a few dividend oriented exchange traded funds (ETFs). This means that for investors seeking a recurring dividend income, dividend mutual funds are not likely to meet their needs.

Finally, I can’t think of a single dividend paying investment where the principal is guaranteed as it is for a GIC. I can think of several that are quite secure, but not guaranteed.

Talk with your advisor about how dividend paying investments could help you reach your financial goals in this challenging investment environment.

Keir Clark, is a senior wealth advisor, with Clark Wealth Management Group, associate director wealth management and branch manager at ScotiaMcLeod in Fredericton, NB. He can be reached online at www.keirclark.ca or by telephone at 506-450-6465.

Information and opinions contained herein have been compiled from sources believed reliable but no representation or warranty, expressed or implied, is made as to the accuracy or completeness.