We think investors will profit most — and with the least risk — by buying shares of well-established, dividend-paying stocks with strong business prospects. Words: 387
In further edited excerpts from the original article* Pat McKeough (www.tsinetwork.ca) goes on to say:
Here are 3 ways dividend paying stocks can help improve your portfolio’s long-term returns:
1. Growth and Income
The best dividend stocks offer both capital gain growth potential and regular income from dividend payments. In fact, dividends are likely to still be paid regardless of how quickly the price of the underlying stock rises.
2. Greater Safety
A dividend-paying company with a long-term record of dividends provides a measure of safety for investors. Dividends, after all, are much more stable than earnings projections. More important, dividends are impossible to fake — either the company has the cash to pay dividends or it doesn’t. That’s not to say that there won’t be surprises that affect every company in a particular industry. Well-established, dividend-paying stocks, however, generally have the asset size and the financial clout — including solid balance sheets and strong cash flow — to weather market downturns or changing industry conditions.
3. Favourable Tax Treatment
In Canada taxpayers who hold Canadian dividend stocks get an additional bonus. Their dividends can be eligible for the dividend tax credit in Canada. This means that dividend income will be taxed at a lower rate than the same amount of interest income (investors in the highest tax bracket pay tax of 23% on dividends, compared to about 46.4% on interest income). Investors in the highest tax bracket pay tax on capital gains at a rate of roughly 25%.
4. Less Competition
In addition, well-established stocks that pay dividends should gain investor appeal as Ottawa’s income trust tax approaches. This new tax, which comes into effect on January 1, 2011, will put trusts on an equal footing with corporations. Right now, trusts pay out a high percentage of their cash flows to their unitholders which lets them avoid paying corporate taxes. It also gives many of them significantly higher yields than a lot of dividend-paying common stocks. The new tax will eliminate these income-tax benefits.
– The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
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