Investing for dividends has appeal for lots of different kinds of investors. Income investors appreciate the predictable flow of income. Conservative investors view dividends as a proxy for well-run, high quality companies. Hard-nosed investors believe that the imposed discipline of dividend payouts makes for efficient use of capital.
Is a mutual fund that focuses on dividends an appropriate investment for you? Let’s take a closer look.
What are dividends? Dividends are a distribution of a company’s earnings to shareholders and are usually accrued in one of two forms – cash or stock. Each organization’s board of directors determines the actual dividend amount that the firm will pay out. Most cash dividends are paid on a quarterly basis. Meanwhile, stock dividends are generally paid at infrequent intervals.
Solid companies. Companies that pay dividends must have actual earnings and cash flows to fund these cash distributions to shareholders.
A company that pays a dividend has less retained earnings to fund organic or inorganic growth opportunities. This means that the company’s management team must be selective with its financial decisions, leading – in theory – to better decisions over the long run.
A long history of steadily rising dividend payments indicates that a company’s management is shareholder-friendly. Dependability. Dividends from strong, established companies can provide steady income. Although quarterly dividend payouts by the fund’s holdings are not guaranteed, dividend-paying mutual funds are a good option for a steady income stream.
Tax considerations. You have the potential to pay less tax on your earnings. Outside of registered plans, Canadian dividends qualify for the dividend tax credit. As a result, dividend income is taxed at a lower rate than interest income.
Downside protection. If you’re concerned about volatility in the stock market, dividend funds could provide some protection. The dividend softens the effect of any decline in the price of the underlying stocks.
Income or growth? To select the dividend fund that’s right for you, we need to start by reviewing your goal for the investment. Is it primarily to provide income? Are you looking for additional growth? Perhaps you need more diversification?
Watch fund names. It’s important not just to rely on the fund’s name. Many investors are surprised to learn that dividend funds can vary widely in both equity content and risk profile. Indeed, many of these funds are not structured solely to produce income, but rather to focus on growth.
To further complicate things, there are plenty of dividend-style funds out there, holding lots of dividend-producing stocks, but without the word “dividend” in their names.
As with all investment decisions, your specific objectives will help us pinpoint the dividend fund that best suits your objectives. If you’d like to understand how dividend investing is aligned with your goals and explore the opportunities, let’s talk.
Larry Kleinmintz, R.H.U., T.O.T., M.D.R.T.
This newsletter is sponsored in part by Dynamic Funds. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performances may not be repeated. Dynamic Funds® is a registered trademark of its owner, used under license, and a division of 1832 Asset Management L.P.
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