Another way to look at your portfolio
The ups and downs of the stock exchange has recently made us aware that stocks are periodically subject to the whims of investors whose hesitation can turn quickly to nervousness.
In reality stock market fluctuations are not only healthy but normal. We should just ignore them, but that’s hard to do when the slightest stock market shifts make headlines, and portfolios can be traded with disarming speed.
Remember that the total return on stocks you hold comes from two places: variation of price + the dividend that’s paid out. Since 1930, the variable dividend constitutes 42% of the total return of the S&P 500 index. So if almost half our total return is earnings from dividends paid, why are we so focused on the other half?
The stock market is a slow road to riches, but it has proven itself over more than 100 years as a reliable tool for creating wealth. Too often, we hope for rapid gains of 10% or 20% so we can see our investments grow. But this type of attitude risks turning you into a speculator where luck, much more than skill, will determine whether you succeed. The stock market isn’t a casino, so we suggest trying to look at things differently.
Knowing that dividends are an important part of the long term performance of an index as diversified as the S&P 500 and that they represent tangible revenue that will grow over time, it would be advisable to look at your portfolio as an investment that will produce earnings that will grow in the long term. In 15 or 20 years, the progressive growth of dividends will become a major component of your total return and even allow you, in some cases, to guarantee part of your retirement income. In fact, you could even draw a parallel to an investment in a revenue property where the main focus is to see revenue come in periodically while the rent goes up by a little every year.
Knowing this, you are better off making sure your portfolio is made up of stocks that pay dividends, maintain them and grow them, rather than spending the least bit of time on daily stock quotes. That’s where the real creation of wealth lies.
Of course, identifying quality securities that pay solid dividends can be more difficult than it appears. A dividend pourcentage that’s too high can sometimes be a trap, because the company that’s paying it might not be able to maintain it indefinitely. Quality is therefore the most important thing to look for when you’re doing this research.
The opinions expressed here do not necessarily reflect those of National Bank Financial. The information contained in the present comes from sources we have determined to be reliable; however we provide no guarantees with regard to this information and it may prove incomplete. The opinions expressed are based on our analysis and our interpretation of this information and should not be taken as a solicitation or offer relating to the purchase or sale of the securities mentioned herein.
Edited on 9 November 2017