John Heinzl Knows Dividends.
A dividend strategy, simplifies investing, in a tax efficient manner, for most Individual Investors. So why don’t Individuals have dividends as the core, at least, if not their entire, non-RRSP portfolio strategy?
Because the headlines shout out the robust growth of China or the amazing Commodities run or the Loonie.
Dividends seem relatively boring.
A timeless BCA Research study indicated that, since 1973, Canadian dividends accounted for over 60% of the total return of Canadian stocks. (Total return is capital gain or price change plus dividends). So dividends contribute double what capital gains contribute to total return.
The U.S.A. is similar.
A classic Northern Trust Global Advisors (NTGA) study further shows that, long-term, the volatility of dividend-only returns was a fraction of the price-only returns. This makes sense. Warren Buffet has said that the value of a business is equal to its future cash flow and, the more certain the cash flow, the more the business is worth. It’s the certainty and security of the cash flow from dividends that tends to moderate volatility somewhat and therefore provide some stability to returns. A regular dividend payment provides a cushion against stock market down drafts.
For Canadian investors, the dividend tax credit means that investors pay a lower tax rate on Canadian dividends than on other sources of income like salary or interest. For 2011, in B.C. the top tax rate on dividends is about 24%. (Interest income is taxed at about 44%). Skewing a portion of your non-RRSP portfolio toward dividends is a tax savvy move. As a rule of thumb, $10 of interest income equals the same, after tax, as $7 of Canadian dividend income. (Note: ‘Canadian’ dividends. Foreign dividends don’t qualify for the dividend tax credit).
Individual investors should forget about trying to assess which dividend stock to buy (and which to not buy). Few of us have the resources need to make an intelligent selection. Even the pro’s have difficulty. Today, rather, Individual investors don’t have to bet on an individual dividend paying stocks. They can simply buy a Dividend Exchange Traded Fund (ETF) for diversification. Individuals don’t even have to choose between XDV or CDZ. Buy a bit of each for diversification.
(Don’t take it from me … read John Heinzl).
So dividends contribute more to long-term performance, dividend paying stocks out-perform non-dividend stocks, dividends are especially important in down markets, dividend paying stocks are less volatile AND are more tax efficient.
My kind of boring.
Doug Cronk CFA is Manager, Investments for a Canadian Pension Plan