August 05, 2010

Focus on Quality Dividend-Paying Stocks

Dividends and Appreciation

Blue-chip dividend-paying stocks should occupy an important part of your investment portfolio. They can be acquired directly by buying shares of solid dividend-paying companies in at least three different sectors of the economy. Some mutual funds or ETFs also specialized in dividend stocks.

Indeed, in addition to often offering interesting capital gain, these stocks also provide regular dividends to their owners. Those dividends may be easily reinvested or provide regular income.

Good Return, Less Risk

Typically, this type of stocks offer higher returns with a lower risk level. Yields on such shares are also often less volatile, i.e. they tend to do better in bear-markets mainly because of regular dividend payments and business strength. In more prosperous times, dividend-paying stock owners can still benefit and expect interesting returns.

In the long run, historical data suggest an average annual dividend of about 3.5% on top of a 6.5% appreciation for regular dividend-paying stocks.

In my mind, other types of stock don’t seem to be worth the risk.

Still Less Tax

In addition, you will pay less income tax on dividend and capital gain than interest.

Also, you should not exclude dividend-paying stocks from your RRSP even if it is already tax-sheltered. Equity yields from quality dividend-paying companies are too interesting to do without.

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