Pattie Lovett-Reid: Secret weapons for smart investors
Pundits are predicting a choppy trading year. In periods of extreme volatility, patience is a virtue and easier to achieve when you’re invested in good quality companies with real earnings and solid balance sheets.
In other words, stocks with a dividend pay investors to be patient.
A common filter used to identify high-quality dividend paying companies is to look at the track record of that payment. Stocks with more than 50 years of dividend increases are considered to be “Dividend Kings,” while those with more than 25 years of consecutive dividend increases are called “Aristocrats.” Stocks with a history of dividend increases during a period of more than 10 years are categorized as “Achievers.”
These are the companies you want to look for – ones that not only pay a dividend, but also increase the payouts over time.
DON’T FORGET TO DIVERSIFY
Dividends plus diversification combine for a one-two punch in an investor’s portfolio. Diversification matters, which is why investing in just one country even if you have a hometown bias can be dangerous.
Should you invest in Canada? Absolutely. Should you invest in the U.S. or other markets? You bet.
For Canadians, investing in Canada is easy. You don’t run a currency risk and the tax consequences are more favourable. The attractiveness of dividends paid in Canadian sectors such as financials and telecom also make it rewarding for investors.
Canada’s big five banks pay between 3.5 and five per cent dividends, and have beaten the Toronto Stock Exchange’s total return over a 20-year period. Telecoms are protected by the federal government and have a history of paying solid dividends to shareholders as well.
As tempting as it is, investing only in TSX companies runs the risk of concentrating too much in energy, financials and materials. Investing some money in the U.S. – the biggest trading market in the world – just makes sense.
LONG TERM PLAYS
When investing, I look for liquidity, transparency and stability. And to help combat market volatility, dividends and diversification are part of my strategy to help smooth things over.
Long term investors will remind you that markets tend to return to the mean over time, while excesses in one direction will lead to excesses in the opposite direction.
Retail investors have a tendency to buy at the top and sell at the bottom. So if fear and greed don’t stamp out your long-term resolve, you have a fighting chance of not losing money.