Canada Life - Nov 27, 2023
To diversify and balance your portfolio, you may want to consider dividend investing. This strategy can help reduce volatility in your portfolio.
Have you considered adding dividend investing to your investment portfolio? Because dividends perform well when interest rates are rising, they can help mitigate the effects of market volatility on your portfolio. Over the long term, dividend investing offers stable, consistent earnings, even when markets fall.
With dividend investing, you invest in companies which generate profit and then pay you part of that profit in the form of dividends. Keep in mind, not all investment funds pay dividends. To receive dividends, you need to invest in dividend funds. With growth investing, the company reinvests its profits to help grow the company.
Dividend vs. growth investing
During times of market volatility, dividend funds can help you earn income while staying invested in equities. Growth funds tend to perform well when prices rise, but they do less well during economic slowdowns when interest rates rise and borrowing costs increase.
- Companies that pay the highest dividends are usually large, well-established firms.
- Dividend investing allows you to get income payouts without having to sell your underlying investment.
- Reinvested dividends can help build the value of a portfolio.
- Growth companies are often young or small firms whose earnings are projected to grow at a rate that will outperform the overall market.
- Profits are realized when you sell an investment that has gone up in value.
- Growth-oriented companies don’t usually pay dividends as they typically invest their revenue in expansion.
Evaluating dividend funds
It’s important to consider which companies are most likely to maintain stable dividend payouts over the long term. This helps avoid value traps.
What’s a value trap? It’s an investment that tempts buyers looking for a bargain. It seems to trade at less than its true value. In the case of a dividend fund, it may have a high dividend yield but poor underlying business fundamentals. It’s a poor investment because it’s unlikely to increase in value or increase the value of its dividends.
Each investment manager has a different approach to dividend investing. Many dividend managers assess a company’s health through in-depth research.
A manager may also look at:
- A company’s profitability
- The strength of its business model
- How much cash the company generates
- How much cash is available to distribute to shareholders
They’ll also evaluate how much the company reinvests in its business growth to determine if the company will be able to provide a sustainable, growing dividend over time.
Diversification is key
You should consider investing in dividends as part of a well-diversified investment portfolio. They can balance growth funds because they can help mitigate risk. But they’re not guaranteed. For example, during the 2008-2009 financial crisis, most major banks either reduced or eliminated dividend payouts.
I can help you choose the right investment -- strong, consistent companies that will pay a durable and growing dividend over time. This can also help enhance portfolio returns and grow wealth, while providing some stability in volatile markets. This strategy also works well with a value investing strategy.
What to look for in a dividend fund
Dividend-paying companies come from a range of industries. Traditionally, they’re in industries with a constant demand for their goods and services across all market cycles. They’re also more likely to have established themselves in their respective industries by building a secure reputation. This means they’re more likely to withstand a period of economic pressure.
Interested in adding dividend investing to your portfolio? Contact me today to set up a time to review your goals and portfolio.
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This commentary represents Canada Life Investment Management Ltd.'s views at the date of publication, which are subject to change without notice. Furthermore, there can be no assurance that any trends described in this material will continue or that forecasts will occur; economic and market conditions change frequently. This commentary is intended as a general source of information and is not intended to be a solicitation to buy or sell specific investments, nor tax or legal advice. Before making any investment decision, prospective investors should carefully review the relevant offering documents and seek input from their advisor. You may not reproduce, distribute, otherwise use any of this article without the prior written consent of Canada Life Investment Management Ltd.