Waiting to invest, or reinvest? Today's column is for you.
I stumbled upon this short online article the other day, and thought it explained well some of the advantages of dividend paying stocks, as to other investment strategies. I was also reminded of a childhood memory when I was first introduced to the nature of dividends, and forming a chant with my little sister, "We like dividends, ...". Lots of goodtimes.
JR
Although it's very encouraging to see markets bounce back to the extent they have so far this year, it's no big surprise that people are still feeling uneasy. The past twelve months have tested our resolve. Because no one can predict the near-term future, most conservative investors, like those nearing or in retirement, would rather tiptoe than dive into the investment markets.
A word of caution to those inclined to get overly conservative and simply stop investing. The research is clear; not investing in things that can provide higher than risk free returns is a risky proposition indeed.
The bounce in markets we've witnessed is not unprecedented. Following most every steep market decline the indices bounce high off the bottom. While the bounce has been impressive, there is building evidence that there is a lot more upside in the coming years as global economic growth resumes.
Investors who want to participate in the upside potential but stay conservative in their approach may find that a diversified portfolio of dividend paying, blue chip equities provides the ideal balance between risk and opportunity. Dividend paying equities are unique because they allow investors to participate in the market's long term growth, while collecting an investment income.
Here are four characteristics you will want to be thinking about as you consider investing in dividend paying securities. First, the combination of income (dividends) and the potential for capital growth is a powerful combination in any portfolio.
Second, the steady stream of income from the investments, builds what is best described as a cushion that supports the share price, even in volatile markets.
Third, compared to interest income, the tax efficiency of dividends as a form of investment income is almost beyond compare.
Finally, dividends are normally paid by the most stable, well established, blue-chip businesses. Even in tough times these strong companies generally remain profitable and continue to share their profits with shareholders via the dividend payments.
Dividend paying securities are available in several different ways. For individuals with portfolios north of $250,000 it makes sense to buy some of the shares directly. For those with less, you can invest using dividend oriented exchange traded funds (ETFs), or through one of several high quality dividend mutual funds.
Tiptoeing or easing your way into investments can be accomplished by buying smaller amounts over time. This process is sometimes referred to as dollar-cost-averaging. It's tougher to do with ETFs and individual shares than with mutual funds, because the former must be bought on the stock exchange and mutual funds are not, but it can be done.
Statistics show that the value of dollar-cost-averaging (DCA) is more psychological than anything else, but because it helps people stick to their investment plan it works. With DCA investors decide how much in total they will invest, then over a period of (usually) months they buy fractions of the investment at whatever the market prices are when purchased. As investment values move up and down they are able to buy some at lower and some at higher prices. This addresses the concern most investors have that they will invest just before the prices fall and then regret making the investment.
With the passing of this financial crisis, much of the risk and uncertainty has been removed from corporate balance sheets. Because of this purge, today investors can have a clearer picture of the financial details and a higher level of confidence in the companies in which they invest.
We believe it`s time to get off the sidelines and get your money working for you. Earning next to nothing in a cash-like investment is not a sensible long term investment strategy. See your advisor today to review your overall financial plan and talk about what investments make sense for you.
Keir Clark is a senior wealth adviser and life underwriter with ScotiaMcLeod in Fredericton
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