Pattie's Blog: Why DRIPS and Aristocrats make rewarding financial friends
Published Wednesday, August 29, 2012 1:07PM EDT
Last Updated Wednesday, August 29, 2012 1:10PM EDT
Today the Bank of Montreal raised its dividend for the first time in five years. I love dividend-paying stocks.
This may sound like a couple of groups to be avoided at the next cocktail party, but taking the time to get to know the Aristocrats and DRIPS could pay off nicely. Dividend Aristocrats and Dividend Reinvestment Plans (DRIPS) have to do with dividend investing. I’ll introduce you to the two of them in a minute, but first I’d like to discuss dividends in general.
It wasn’t all that long ago that dividends were largely ignored by many investors, but they have certainly come back into vogue and with good reason. Dividends can play an important part in a balanced portfolio and here’s why:
Consistent dividend payments could be an indicator of a company’s health.
You get paid to wait. Dividends are a source of income while you wait for potential appreciation in your stocks.
In a market downturn, dividends received can help cushion some of the impact of falling stock prices.
The cash realized from dividends could help reduce the volatility of the overall portfolio.
Dividends are taxed at a preferred rate compared to interest income.
Years ago, investors bought stocks mainly for their dividends. If a company cut or hiked its dividend it was considered to be a major event. Over time, though, investors turned away from dividend-paying stocks. Dividends sunk to all-time lows and many companies paid no dividends at all. So why the change of heart? In part, we can blame the dotcom boom and the fortunes made from capital appreciation in the 1990’s bull market.
Since then, plenty has changed to turn investors back on to dividends, including the bursting of the dotcom bubble, geopolitical events and the recent economic and financial crisis in the US and Europe.
With volatile markets and capital appreciation hard to come by, coupled with the decline in interest rates, investors have been turning to dividends to compensate for lower fixed income yields.
Let’s meet our new best friends:
Not only do I like dividends I like Dividend Aristocrats, as you might imagine, they form an elite club, which is made up of a set of companies that have a proven record of increasing dividends. Look for companies that have increased cash dividends annually for at least five years, are listed on the S&P/TSX and have a minimum market capitalization of $300 million.
What about DRIPS?
You can add the power of compounding to your stock dividends through Dividend Reinvestment Plans or DRIPS. Some of the benefits include:
Buying regularly over time could enhance your returns.
There are no fees or commissions to invest in more shares of the dividend paying company.
DRIPS allow you to invest in small or large amounts.
I’ve often said I like to invest in boring companies that have real earnings and pay a dividend. Well I’ve now decided it is never boring making money and I like the concept of slow and steady wins the race. Never mind dividends are paying you to wait – they are paying you right now. What’s not to like about that?