Where Are Equity Markets Headed? Be Defensive With Dividends

With the strong performance of U.S. technology stocks, dividend-paying stocks have received less attention as investors focus on earnings growth. However, many are beginning to question whether this momentum is sustainable. As economies and markets show signs of slowing, a more defensive investment approach may be necessary — and this is where dividend investing can provide value.

While recent market trends have favoured growth stocks — companies that typically prioritize reinvesting profits back into their operations rather than distributing them — here are a few reminders of why dividends continue to play an important role in our portfolios.

Dividends have historically contributed a significant portion of equity returns. Studies show that at least 60 percent of North American total returns have come from dividends in the past century.¹ Reinvesting dividends can also significantly enhance returns. Since 1985, S&P/TSX Composite reinvested dividends yielded three times the return of relying solely on price performance.

Dividends provide other benefits, including:

• Reliable income stream. This is particularly beneficial for those investors approaching retirement.
• Potential inflation hedge. Companies regularly increasing dividends often keep pace with inflation.
• Reduced volatility. Many dividend payers are mature, stable businesses with predictable cash flows and may be less susceptible to price volatility. Dividends can help smooth out price swings, providing a cushion during difficult market times.
• Long-term financial stability. Consistent dividend payments can indicate a company’s solid financial health and commitment to sustaining shareholder value. Quality companies that prioritize dividends often have robust balance sheets, helping to weather prolonged market downturns.

The potential tax advantage should not be overlooked. In non- registered accounts, eligible dividends are taxed at a lower rate than interest or regular income, thanks to the federal dividend tax credit. An article from years ago in The Globe & Mail is worth recounting: “How to earn $52,000 tax free — no offshore account required.”

It highlighted a lesser-known advantage of the dividend tax credit: the ability to earn up to $52,000 in tax-free income from eligible dividends, depending on the province.² While this amount has increased to $55,704 for the 2024 tax year, note that with no other sources of income, the dividend tax credit and the basic personal amount can effectively reduce taxes on eligible dividends to zero (chart).

In short, I continue to advocate quality dividend-paying securities to support investing programs.

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^{1. https://privatewealth-insights.bmo.com/en/insights/market-insights/investment-strategy-july-2024/; 2. https://www.theglobeandmail.com/investing/education/article-how-to-earn-52000-tax-free-no-offshore-account-required/}

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