Everyone has their own reason for buying dividend-paying stocks. Some investors buy dividend stocks for the income. Others buy them for the benefit of enrolling in a Dividend Reinvestment Plan. I buy them for various reasons, but for me one of their best benefits is their secret super-power: supporting willpower.
Bank of Nova Scotia, BNS, and the Best Benefit of a Strong Dividend for the Investor
A couple of years ago, I bought some stock in the Bank of Nova Scotia, often called ScotiaBank. It had room to increase its dividend and was already paying a pleasant 3.7% per share, miles above the rate then offered by GICs. Given that it is one of the “big 5” Canadian banks to many minds, including mine, it had about the same security as a GIC, admittedly without the benefit of CDIC backing.
Anyway, BNS had a minor pullback of about $5 so I gleefully logged on and bought some shares.
You’ve all read this book before: the stock promptly plummeted.
In fact, it fell as much as $12 a share during the course of its following rollercoaster value ride.
But each quarter, that handsome dividend popped into my account. And in fact, it grew. In the short time I’ve held the stock, the yield is now 3.81% based on the price I paid for the shares. UPDATE: Now it’s 4.1%!
Dividends Can Encourage Patience and Support Staying with a Stock
That steady, rising dividend provided me with the patience to stick with my purchase even through the dropping share price.
On paper, I had lost 20% (!) of my investment. If I had sold the BNS shares, that would have been a real, irretrievable loss. Since this investment was in a registered account, I could not even have claimed the loss against another capital gain to mitigate taxes. It would have been a real permanent loss.
However, bolstered by the dividend, I stuck to my investing plan. I still believe that the Bank of Nova Scotia was a decent investment at a decent price. I expect in the long term it will appreciate in value. And it was purchased as a long term investment.
Now, the price of Bank of Nova Scotia stock has gradually climbed back up to where I bought it. By not panicking and selling an investment I believed and believe has merit, I did not experience a capital loss. In fact, I am slightly ahead because of the dividend.
Staying with a Stock Should Depend on the Future Prospects for the Company
I’m not saying you should stay with every stock that plunges. Anyone who invested heavily in Yellow Media, YLO, knows that sometimes, no matter what the yield, you have to man the life rafts and watch it sink.
However, if you’ve looked again closely at what a company is doing, and maybe sounded out the opinions of others on the same stock, and you still believe the company is worthwhile then you may just need to grab your willpower and hold on.
Should You Only Invest in Dividend Paying Stocks?
No. I wouldn’t say that. I do think there’s nothing wrong with investing in only dividend stocks, but neither is there anything wrong with investing purely for capital gains. It depends on your investing goals, philosophy and style.
Stocks that Pay No Dividends Must Cover Inflation before Making a Profit
However, I will say it has been much harder to sit tight and wait for an investment in a resource stock to rebound. This stock does not pay any dividends. It has been caught, like most petroleum stocks, in the world-wide sine-wave cycle of oil consumption and prices. Just as Suncor and Imperial Oil have had their low spots in the past two years, so has this one.
I intend to hold and wait as I still believe the company is sound and it will rebound. But knowing that the money invested in that stock is stagnant, earning nothing while I wait, is annoying. Next time, I think I would probably not invest in a similar stock if it didn’t offer at least a small dividend.
As it stands right now, this stock has to rebound about 6% above what I purchased it at, just to cover off the cost of inflation since I bought it. The BNS stock, on the other hand, covered inflation with its dividend.
When Practical Buying for Capital Gains and Dividends Makes a Great Combo
Not every stock offers both the potential for capital gains and a good dividend. But stocks that do offer both make a great combo deal. If you spot one, give it a really serious look. You might make a delicious little profit, with a side order of less stress!
Further Information
If you’re holding onto a dividend paying stock for the long term, you might also consider a dividend reinvestment plan. For more info, you may like to skim
- Pros and Cons of Setting up a DRIP for Dividends with CIBC Investor’s Edge ShareBuilder Plan
- Pros and Cons of Using a DRIP for BMO InvestorLine Dividends
Join In
Do you prefer to invest in stocks that pay a dividend? How much does the dividend help support your decision to hold on to the stock? Please share your experiences with a comment.
Dividends are attractive for various reasons like you pointed out. I like to invest in stocks that pay dividends because they are generally safe investments. Dividends can indicate that the company is financially healthy.
Good points! Many dividend payers are also more established companies which may make them somewhat safer investments.
A dividend-paying stock offers a yield to shareholders, payable at certain times of the year. That income can be reinvested to buy more shares or deposited in the shareholder’s bank account.
That’s generally true. The income won’t be deposited in the shareholder’s bank account if the stock is held in a registered account such as a TFSA, RRSP, RESP, RRIF etc. though. It will be deposited in the cash ledger within their registered account.
Investing in dividend paying stocks is not a bad idea. As you said that it depends on us that what is our goal and what we want to achieve. Dividend paying socks can be a great investment and they are becoming very popular in the stock market. These stocks perform better in overall market even at the time when stock prices are low.
In fact it’s possible that dividend paying stocks may be a little TOO popular right now. Some investors are buying them because of the incredibly low rates for fixed income investments like bonds and GICs. The downside of that is that if the interest rates for GICs, for example, should increase to be similar to that of the dividend yield, many of these same conservative investors will decide to dump their dividend paying stocks. That may lead to a (temporary) slump in the prices for blue chip dividend stocks. Personally when we bought we knew that this is a risk and we plan to hold them even if their values drop substantially for a short time.