Dividends. You've heard of them, but what exactly are they and why do people like them so much?
A dividend is a payment a company makes to its shareholders. Some companies have excess cash sitting in their bank account after paying their expenses and spending money to grow the business. A dividend can be good for a company's share price, as it implies that the companies is profitable and stable. Plus, many investors love dividends so it can increase demand for the stock.
For investors like us, a dividend has a lot of benefits. For one, the cash you get from a dividend can be higher than what you'd get on a GIC, especially since interest rates tanked after the financial crisis. Some companies increase the dividend every year, which means the income you get from your investment grows too - perhaps faster than inflation. The Canadian banks, for example, have a long history of good dividend growth. There are other benefits, like the Dividend Tax Credit, which reduces the amount of income tax you pay on dividends, and DRIPs, which allow you to get your dividend in more shares, rather than in cash.
Just because a stock pays a dividend, it doesn't mean it's a better investment. Companies that pay dividends often do so because they aren't growing as fast as other companies. A company that needs every penny of its profits to re-invest in the business to grow won't pay a dividend. These fast-growing companies can see their stock prices go up a lot more than a more established company. So whether you should own more dividend-paying companies depends on your preference, although all portfolios can benefit from owning at least some.
So how do you get in on the action? If you already own a mutual fund or ETF, you don't need to do anything. All broad-market funds will own dividend-paying stocks. If you want more dividends, you can own a dividend-focussed ETF or mutual fund, or you can buy the stocks directly if you feel capable and have enough money to be diversified.
You can read more online as there are websites dedicated to Canadian dividend investing. You can find lists of the highest dividend-paying stocks, but be careful: a high dividend yield doesn't necessarily mean it's a good investment. You might be better off buying a dividend-focussed fund rather than individual stocks if you're looking for more income.
