What are dividend-paying stocks, and what are their benefits?

Dividend stocks are an attractive investment because they can provide a regular source of income from dividends with the additional potential for capital appreciation or growth. When taking both of these factors into account, returns can add up over time. It is these two sources of return that make them attractive.

There are companies in a number of different industries that pay dividends. Dividends are typically paid by big mature blue-chip companies, ones that have been around for a long time. These companies may not need all of their cash flow to pay off debt or to fund growth, so instead of putting back money in the company to accelerate growth, they may choose options like buying back shares or paying cash out to shareholders as a “reward” for owning their stock.

Many companies that pay dividends have a history of increasing them over time, which can give you more income and help keep up with or exceed inflation.

Something to keep in mind is that companies that pay dividends are still susceptible to market ups and downs. But when the markets do drop, the companies with strong track records of dividend payouts can still provide that consistent income even if the stock drops in value. Be aware that dividend payments can also be cut or eliminated.

Dividend-paying stocks are great cash generators when you need the money, but if you don’t need the cash and you own stocks of these companies in a retirement plan for the future, you can still benefit from owning them today. Not only can they appreciate in value over time, but the income they provide can be set up on a dividend re-investment program. That way, if you don’t need the income now, the money paid from dividends will be reinvested to buy more shares. This keeps your money working for you by continuously buying more shares over time and benefiting from that capital appreciation until you actually need the money.

Also, dividends received from Canadian dividend companies receive a preferential tax treatment in a non-registered account (meaning outside an RRSP or TFSA). These are called a grossed-up dividend tax credit, so your returns are taxed more favourably than income producing vehicles like a GIC or savings, making them a good option for many portfolios.

Todd Yuzdepski, CFP®, CIM®, FCSI®, BA Wealth Advisor

Information in this article is from sources believed to be reliable, however, we cannot represent that it is accurate or complete. It is provided as a general source of information and should not be considered personal investment advice or solicitation to buy or sell securities. The views are those of the author, Todd Yuzdepski, and not necessarily those of Raymond James Ltd. Investors considering any investment should consult with their Investment Advisor to ensure that it is suitable for the investor’s circumstances and risk tolerance before making any investment decision. Raymond James Ltd. is a Member - Canadian Investor Protection Fund.