The long-term case for dividend-paying equities continues to be compelling. During volatile markets, such as we are experiencing today, dividends can play a role in reducing overall portfolio risk and volatility. Over the longer-term, increasing dividend payouts and the potential for compounded growth can make dividends an integral part of an investment portfolio. Here are some reasons to have confidence in the value of dividend-paying securities within your wealth management strategy:
An integral component of long-term returns. Dividend-paying companies represent a significant part of long-term returns within the equity market. Over a period of 30 years, from 1992 to 2022, the compounding effect of dividends on the S&P/TSX Composite Index has been profound — with reinvested dividends providing around half of total returns. On this basis, a notional investment of $10,000 would have yielded around $60,423 today on the index alone, but around $126,934 if dividends were reinvested, as based on the S&P/TSX Composite Total Return Index (chart below).1
A potential source of cash flow that can be used for income or reinvested. In today’s economic landscape of lower interest rates, slowing growth and a growing number of retiring baby boomers, finding income may be more challenging. Dividends can help to provide a steady stream of income to an investor or enhance income from other sources.
Historically have provided greater protection in bear markets. Companies that consistently pay dividends year after year are generally seen as having robust economic health because they have excess cash with which to pay shareholders. Unhealthy companies generally do not have the position to provide dividends to shareholders. The dividend yield of a stock can provide a degree of downside protection as it reduces the potential impact of a decline in share price during economic downturns. Studies have also shown that dividend-paying stocks are a useful buffer when investors experience high degrees of volatility.2
A tax-efficient means of investing. Remember that not all income sources are treated equally by the tax authorities. Eligible dividends are one of the lowest taxed sources of investment income in Canada, as compared to interest and regular income. This is due to the non-refundable tax credit applied to most “eligible dividends,” generally dividends issued by Canadian companies. Consider that for each dollar of dividend income received, an Ontario resident taxed at the highest marginal tax rate would keep about 14 cents more on every dollar of fully taxable income, which isn’t insignificant by any measure. (This assumes a 53.53 percent marginal tax rate and a 39.34 percent effective tax rate for eligible dividends.)
Potential for dividend growth. Don’t overlook the potential impact of dividend growth. Well-established dividend-paying companies can typically increase their dividend payouts from year to year. As we have seen this year, despite the turbulent markets, a variety of Canadian financial and energy companies have announced dividend increases.
In short, we continue to advocate the benefits of quality dividend-paying stocks as part of a wealth management plan.
Sources: 1. S&P/TSX Composite Index and TR Index, 12/31/91 to 12/31/21; 2. Franklin Templeton Investments, “The Case for Dividend-Paying Equities in Today’s Market”.