This article was reviewed by Jay Brecknell, CFP®.
What are dividends, and what can they do for me?
If you have heard the term dividend before, but are not entirely sure what it means, a simple explanation is: when a company earns a profit, it can either keep that money and re-invest it back into the company, or the company can pay out some (or all) of its profit out to the shareholders. Profits that are paid out to shareholders are called dividends.
Why are dividends important?
Dividends are extremely powerful when they are put to work in your portfolio. Consider this example:
As you can see, $100,000 invested in the S&P TSX Composite in 1990 would be worth $496,091 today simply due to the price increase over time of the shares in this portfolio.
(The S&P TSX Composite Price is the blue line in the chart above and does not include dividends.)
BUT…if you re-invested all the dividend income paid out by those shares over the same period, your initial $100,000 investment would be worth over $1 million dollars today – more than DOUBLE the share price growth during the same period. Now that is POWERFUL!
(The S&P TSX Composite Return is the red line in the chart above and includes reinvested)
According to James McInnis, Portfolio Manager at BCV Asset Management, “Investors often underappreciate the power of compounding, but in this chart, you can clearly see the value created by dividends.” (source: August 2020)
An additional bonus of dividends is that when share prices are down, dividend income still provides a revenue stream without you having to sell any shares. Plus, dividend paying shares are often perceived as a better value compared to shares that don’t pay out any dividends.
If you would like to learn more about the power of dividends and how they can be put to work in your own portfolio, reach out to us via phone or email. We would love to hear from you!
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