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The case for dividend investing
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By Fund Library News Wire  | Tuesday, December 11, 2018


 

  

By Mark Brisley, Managing Director and Head of Dynamic Funds

Whether you’re seeking retirement income or long-term capital growth, dividend ETFs provide a number of significant benefits, including portfolio diversification, potential tax savings, and competitive yields – all in a single investment vehicle. Additionally, some dividend ETFs offer investors low-cost access to active management – an added potential benefit for many investors during periods of market volatility. Let’s see why exposure to dividend-paying companies remains a sound equity investment strategy – even in a rising interest-rate environment.

The case for dividend investing

Dividend investing – particularly dividend growth investing – is the process of creating a diversified portfolio of ETFs whose underlying companies have the ability to pay and grow their dividend over the long haul. Dividend growth is often an indicator of well-managed companies that have the proven ability to generate reliable earnings.

Over the past 30 years or so, reinvested dividends have contributed nearly 35% to the S&P/TSX Composite Total Return Index, representing, on average, an additional 2.7% of returns per year.

Growth vs. Yield

While some investors may be lured by a stock’s dividend yield, it’s important to realize that much of the power of dividend investing derives from compounding and reinvesting dividends. Consequently, it’s important for investors to identify companies that are financially stable and able to consistently grow their dividend payments from future profits. As Figure 1 illustrates, dividend-paying equities – especially dividend growers – have vastly outperformed their non-dividend-paying peers.

The power of compounding

Companies with consistent dividend growth are especially appealing to investors. Consider the following numbers: If you invest in a stock that pays $1 in dividends annually and costs $25 per share, it means it yields 4% at the time of purchase. If the company increases its dividend 10 cents every year, in 10 years that same stock you bought for $25 will be paying out $2 in dividends, a much improved 8% yield on your initial $25 purchase. And those numbers get even better when you reinvest those dividends to purchase additional shares.

With bond yields at historic lows after 2008, investors began searching for higher income yields on the equity side of the equation, (i.e., dividend-paying equities). Now that rates are finally rising, dividend stocks are coming under pressure as an income alternative. Despite this rising-rate environment, dividend-growth investing remains attractive for a number of reasons.

With the S&P 500 recently marking its longest bull run in history this past August, North American equity markets show few signs of weakness. Because many of the dividend growers are companies that benefit from higher global growth, they are able to return profit to investors through increased dividend payments. Therefore, the outlook for dividends should remain strong. Additionally, dividend growers tend to be more stable companies, so dividend ETFs can potentially provide a measure of downside protection during periods of market instability.

Finally, while interest rates have been on an upward trajectory in 2018, the U.S. 10-year bond yield has now stabilized below the 3% threshold. Unless bond yields climb significantly, dividend-growing companies (and dividend ETFs) continue to be an attractive yield source for investors and retirees alike.

Mark Brisley is Managing Director and Head of Dynamic Funds, one of Canada’s largest asset management companies. With over 25 years of industry experience, Mark is responsible for the firm’s strategic execution, day-to-day business operations and business development.

Notes and Disclaimer

© 2018 by Fund Library. All rights reserved. Reproduction in whole or in part by any means without prior written permission is prohibited.

Important information

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund and exchange traded funds (ETF) investments. Please read the prospectus before investing. Mutual funds and ETFs are not guaranteed, their values change frequently and past performance may not be repeated. Dynamic iShares® Active ETFs are managed by BlackRock Asset Management Canada Limited and invest in selected mutual funds managed by 1832 Asset Management L.P. Dynamic Funds® is a registered trademark of its owner, used under license and a division of 1832 Asset Management L.P. iSHARES and BLACKROCK are registered trademarks of BlackRock, Inc., or its subsidiaries in the United States and elsewhere. Used with permission. ™Trademark of its owner, used under license. The information provided is not intended to be investment advice for specific investments advice tailored to their needs.

 

 
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