There are two ways to make money with stocks:
- Appreciation (the difference between the purchase price and the sale price). Otherwise known as capital gains.
- Dividends (regular cash payments the company sends you a check for or which get deposited into your brokerage account).
Most investors seem to focus exclusively on speculative gains (the appreciation), going so far as ignoring dividend payments when reporting stock market results over long periods of time.
Dividends (even just considering a Canadian context) is WAY too large a topic for a single blog post, so I’ll apologize in advance for a (necessarily) shallow treatment.
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What Dividends Say About a Company
There’s some dispute about whether it’s a good thing or not if a company pays a dividend. The argument against it is that the company can retain the earnings that would have been paid out to shareholders and grow the company in a more efficient manner. Say a company pays out $1 million a year in dividends. They could use this money instead to expand their sales force, increase the production capacity of their factory, acquire a small company in a related industry or increase their advertising (and hopefully future sales). Advocates of this policy feel, given a good company, reinvesting the earnings is a better investment than anything else they could do with the money. Berkshire Hathaway, Warren Buffett’s holding company, has never paid a dividend and Microsoft just recently started paying a small dividend (until now they’ve reinvested in explosive growth).
The counter-perspective is that dividends are cold hard cash and a company’s ability to continually pay them provides concrete evidence that the company is performing well. Accounting malfeasance (such as Bernie Madoff) is harder, or impossible, if a large transfer of cash is going to shareholders on a regular basis. Further, dividend investors may feel that THEY are able to better reinvest the earnings then the company that paid them (perhaps in another company they feel is undervalued, or in another investment category like real estate or some commodity).
Examples of Canadian dividend stocks
Each of the big 6 Canadian banks is a Canadian dividend stock, as are many of the Canadian companies you’ve heard the name of (such as Loblaws, Shoppers Drug Mart, or Tim Hortons). Personally, all stocks I own are dividend payers and in addition to the US companies General Electric and Bank of America, the Canadian dividend stocks I own are:
- Bank of Montreal
- National Bank
- Russel Metals
- Bank of Nova Scotia
- Imperial Oil
- Transcanada Corporation
In “The Lazy Investor”, Derek Foster recommends a portfolio made up of: Scotiabank, Enbridge, Imperial Oil, Fortis, and Riocan REIT.
If you come across the term DRiP while reading about dividends, it refers to a dividend reinvestment plan (which is a topic for another day). MoneyEnergy has a VERY, VERY good series of posts on DRiPs (on the right side of her page, halfway down).
An excellent list of dividend paying Canadian companies is maintained at the Canadian DRIP & SPP List. The Claymore S&P/TSX Canadian Dividend ETF provides a list of strong Canadian dividend stocks. As an ETF, it’s an low-fee way to invest in a diversified collection of Canadian dividend companies (if that’s your bag, baby).
Dividends paid by Canadian companies get a favourable tax treatment. This certainly improves their returns for Canadians!
Canadian Dividend Investors
Tom Connolly publishes an great newsletter focused on investing in Canadian dividend companies. While his newsletter is closed to new subscribers, there is an archive of past issues at the North York Public Library and he maintains some freely available information at his website.
While he can be a controversial figure in the Canadian investing scene, Derek Foster has published 4 books which I feel are worthwhile reading for a beginner interested in dividend investing.