A bit of context: Investors may not realize it, but dividend stocks already generate more than half of their returns, as most companies listed on market indices pay dividends. In the past, it was mainly utilities, telecom companies and banks that paid out dividends. Now technology stocks, retail stocks – all types of companies – are issuing dividends, as long as they can. This is another reason why stocks that pay dividends are attractive: they inspire confidence that a company has healthy cash flow, earnings and profits.
My approach to investing in stocks that pay dividends is to focus on the stock’s growth potential rather than just buying stocks that pay the highest dividends. I do this for two main reasons:
1. I am focused on long-term growth.
2. As I see it, investing in stocks that pay dividends allows me to get paid while I wait for my investments to appreciate in value: a great recipe for success.
Here’s what you need to know about dividend-paying stocks:
What is a dividend paying share?
A dividend-paying stock is a company that regularly distributes a portion of its profits to shareholders. Usually companies pay dividends every quarter. Dividend is not mandatory. They are not guaranteed and can be increased, decreased or eliminated at the discretion of the company issuing the dividend.
While they are not required to pay dividends, companies that do will avoid cutting or eliminating their dividends as this could signal to the market that there is a problem, which could cause the stock price to fall. Some companies even increase dividends over time. This has certainly been the case for dividend-paying companies in Canada’s financial sector. Canadian banks, for example, tend to increase their dividends twice a year.
What you earn with a stock that pays a dividend
Your total return on dividend shares consists of two parts: the regular dividend payment and the appreciation of the underlying shares. Even if the share price falls, you will still receive the dividend.
This post Hedging against inflation with dividend paying shares
was original published at “https://www.moneysense.ca/save/investing/hedging-against-inflation-with-dividend-paying-stocks/”
