Many of the financially-savvy followers of Everything Retirement know that we cover investment issues on a regular basis. The reason is simple: we’re supported by partners at Interior Savings, Coastal Community Private Wealth Group and Coastal Community Credit Union, and credit union financial advisors are an excellent source of counsel and advice about most pre-retiree and retiree money matters.
One investment option that deserves attention in these still turbulent times is dividend investing, a sometimes-overlooked option that we think is worthy of explanation and scrutiny.
Dividend Investing Explained
Dividend investing is a technique of purchasing shares of companies that pay dividends regularly to their shareholders. When you buy a dividend stock, you get a portion of the organisation’s profits. This method, in principle, is designed to provide passive income while increasing one’s portfolio value over time.
Standing at the heart of dividend investing is the so-called rule of 72. This is a calculation that estimates the number of years it takes to double your money at a specified rate of return. If, for example, your account earns 8%, divide 72 by 8 to get the number of years it will take for your money to double. In this case, 9 years.
Some Historical Contexts
To put the rule of 72 into historical context, we must look to the work of the Franciscan friar and Italian mathematician Luca Pacioli. He is widely considered to be the father of accounting. In 1494 he published a seminal textbook “Summa de arithmetica, geometria, proportioni et proportionalita” or (Summary of arithmetic, geometry, proportions and proportionality) in which he describes the rule of 72 for predicting the number of years to return double the original capital.
Safe But Unspectacular
The rule of 72 is derived from a more complex calculation and isn’t perfectly accurate. The most accurate results from the rule of 72 are typically based at the 8% interest rate, and the farther from 8% you go in either direction, the less precise the results will be. Still, this handy formula can help you get a better grasp on how much your money may grow, assuming a specific rate of return.
Dividend investing is widely regarded as safe but unspectacular – in terms of the returns it tends to generate. But if you are a believer in slow and steady wins the race, then it’s a strategy you may wish to adopt.
A big booster of this strategy is John Heinzl, a financial analyst and frequent contributor to The Globe and Mail. He’s a big fan of dividend investing and we want to share the reasoning that drives this belief with you.
Dividend Investing Is Easy To Understand – & Relatively Stable
When a company makes a profit, it reinvests some of that profit back into the business and forwards the balance to shareholders as dividends. Especially for the small investor, it’s a simple strategy.
Dividend-paying companies tend to be well established and soundly managed, such as utilities, telecoms and banks. While stock prices can be volatile, dividend payments tend to be – as Mr. Heinzl reports – “stable and predictable”.
This conclusion is generally supported by commentary, with one caveat, from Investopedia: “Stocks that pay dividends typically provide stability to a portfolio, but do not usually outperform high-quality growth stocks”.
Dividend Investing Supports Buy-and-Hold
As we have written many times in the past, rapid trading is a self-defeating tactic. Mr. Heinzl reminds us: “Regular dividend payments help to tame your inner trading beast because they reward you for staying the course.” Dividend paying stocks can be the backbone of a sensibly diversified portfolio.
Dividend Investing Delivers Tax Advantages
Although the tax situation varies from province to province, in general Canadian-listed companies benefit from what’s known as the dividend tax credit (DTC), which reduces – in some cases significantly – the amount of tax an investor pays. Ask your credit union financial advisor about this feature of dividend investing relevant to the province in which you live.
Ask Your Credit Union Advisor To Learn More
What we particularly like about dividend investing is that it tends to eliminate investor fixation with day-to-day stock market performance. Markets will fluctuate, but a dividend investing strategy – provided you own high-quality companies that raise their dividends regularly – your dividend income should continue to grow, as Mr. Heinzl attests: “during bull markets, bear markets and sideways markets.”
It’s hard to beat that glow you get by being invested in a company that – all being well – forwards you money on a regular basis. It’s oddly relaxing. And in times like these, there’s nothing the matter with that. Consider reaching out to one of our credit union partners if you’d like to learn more and determine if this option is right for you.
