– by Peter Dolezal –
Unless exclusively in savings accounts or GICs, there are very few bullet-proof investments one can make which provide total peace-of-mind for an investor. Unfortunately, such safe choices will result in after-tax returns unlikely to even keep pace with inflation. Hence the need for at least a portion of equity-based products in most portfolios.
Equity investment products that pay regular, and ideally increasing, dividends, should go a long way toward reducing investment risk, and hence an investor’s stress level.
A rather dramatic example will prove the point. The decade book-ended by the high-tech meltdown of the early 2000s, and the major 2008/2009 downturn, ended on December 31st, 2009.
Had an investor bought, and held, the entire TSX Index through a low-cost Exchange-Traded Fund at the beginning of that decade, he would, surprisingly, have achieved a respectable 5.6% average annual total return. Had he focused solely on the dividend-paying component of the Index, the return would have zoomed to an average annual return of 11.4%. Even more dramatically, had he selected only those equities which had increased dividends annually for at least 10 years, the return would have risen even further, to a spectacular average 13.5% annually.
If dividends can make such a significant difference to investment returns in a decade which experienced the two most dramatic market adjustments of the past 50 years, surely there is a lesson to be learned: the awesome power of dividends to super-charge a portfolio’s returns. In any past 50 years, dividends have been responsible for over 40% of total returns of market indexes in North America.
The logic is easy to understand. If a portfolio delivers, for example, a steady, and easily-attainable 3.5% average dividend yield, it will partially be insulated against market downturns. When markets rise, because dividend-paying products are generally the cream of an Exchange, the portfolio should outperform the total Index.
Dividend-investing is by no means a one-stop solution for all investment concerns. Equally important are: minimizing investment holding costs; achieving broad product, sector, and geographic diversification; and an appropriate fixed-income allocation.
Although dividend investing does not provide the unconditional security of a GIC, it produces a much higher yield and, over a long-term investment time horizon, it can provide a major boost to a well-designed portfolio.
A retired corporate executive, enjoying post-retirement as an independent Financial Consultant (www.dolezalconsultants.ca), Peter Dolezal is the author of three books: including his most recent, The SMART CANADIAN WEALTH-BUILDER.
