Previous articles have dealt with managing risk when investing in equities. Highlighted were the risk-mitigating benefits of managing investment costs, minimizing the effects of exchange-rate fluctuations, selecting an appropriate mix of equity versus fixed-income products, and achieving high levels of both geographic and product diversification.
Selecting dividend-paying equities as a key component of one’s portfolio strategy is another major tool that is available to the investor. It is an important means of moderating market-risk on the equity portion of investments. An example will illustrate.
Morningstar, an independent research organization, issues many analyses of financial markets and its many products. One of these reported on the 30-year performance of the TSX Index, both with dividends reinvested and without. The results are worthy of serious attention.
Morningstar reported that had $10,000 been invested in the TSX Index in January 1981 without the reinvestment of dividends, it would have reached a value of $61,176 by Dec. 31, 2010 – a respectable 6.2 per cent annualized price return.
Had the same investor instead chosen to annually reinvest all dividends earned by his investment, the value would have been $137,145 – a spectacular 9.1 per cent annualized total return – particularly since this 30-year period included seven substantial Bear Markets.
No matter which decade of equity investments one selects, dividends have always accounted for a huge part of an investor’s total return on the TSX. Imagine how much better the quoted result would have been if the investor had only chosen those companies that have a long-term track record of paying and increasing dividends. Currently, out of some 300 companies that comprise the TSX, fewer than 50 meet these criteria. That part of the index represents the cream of the TSX – its lowest-risk component.
Among the approximately 300 low-cost exchange-traded funds that are available in Canada, quite a few focus on the dividend-paying components of Canadian, U.S., and international indexes. Risk-averse equity investors should be aware of these products and give them serious consideration.
A retired corporate executive, enjoying post-retirement as a financial consultant, Peter Dolezal is the author of three books. His most recent, the Smart Canadian Wealth-Builder, is now available at Tanner’s Books, and in other bookstores.