Investing in dividend-paying securities is a great way to shore up your portfolio’s defences during bumpy markets. They can provide consistent income, potentially enhancing portfolio protection and growth over time.
The last year has been a challenging one for investors. Both equity and fixed-income markets have experienced significant volatility driven by a rapid rise in interest rates to combat soaring and persistent inflation and an over-heating economy. More recently, markets having been wrestling with concerns that rising rates may cause an economic slowdown.
Playing D: Defence and experience win championships
No matter what market conditions you may face in the short term, dividend-paying stocks have been a mainstay for investors because they have historically demonstrated their ability to generate long-term positive and reliable returns. Especially in the Canadian equity market, dividend-payers are often well-established, soundly managed companies with stable businesses.
Whether you are seeking income to support your cash-flow needs in retirement, or you want to take advantage of growth through compounding the payments these stocks provide over time, or both, history has shown that dividend-paying stocks can help smooth returns and provide market-leading returns.
The dividend “defence”: The smart choice for patient investors
As we have seen more recently, dividend-paying stocks can wilt in the face of increasingly higher interest rates and bond yields. That’s because comparatively fixed-income investments such as bonds provide attractive relative returns with less risk. But as the conditions for higher interest rates – usually rising inflation – fade, dividend-paying stocks historically regain their shine. Unlike fixed-income investments, dividend-paying stocks partake in the growth of a company’s business over time, highlighting the double benefit of income and potential growth these stocks can provide.
Importantly, dividend-growing stocks – those stocks that see their dividends grow annually or at least regularly – are often able to offset, fully or partially, the corrosive effects of inflation, in turn helping investors to maintain the purchasing power of their dividend income, either to reinvest those dividends, or to use them for their specific cash-flow needs.
The ultimate team player: Dividend-paying stocks can smooth portfolio performance
Dividend-paying stocks can also help to reduce the volatility of a portfolio, while at the same time provide downside protection.
Again, it is often the case that dividend-payers – and especially those that consistently grow their dividends over time – are “blue chip” companies that are well-managed, have strong fundamentals, and can afford to pay out a significant amount of their income due to their stability and financial strength.
In summary, dividends offer three key benefits:
First, they can generate income from your portfolio to support your cash-flow needs. Second, they offer historically solid performance to help grow your portfolio. And, third, they can help reduce the volatility of your overall portfolio.
The well-known truism in sports is that defence and experience wins championships – talk to us about how we can bolster your portfolio defences, while helping to add to your investment “Win” column.
*Dividend Growers, Payers, Cutters and Non-Payers are determined annually. Growers had a positive 12-month change in dividends paid; Payers paid dividends; Cutters had a negative 12-month change in dividends paid; Non-payers did not pay a dividend.
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