A company’s stock return consists of two main factors: capital appreciation (company growth) and dividend contribution (the portion of company net earnings distributed back to shareholders). In the last 50 years, dividend contribution has accounted for about 39% of investor returns (based on the Canadian Stock Index’s total return). The 1990’s were a period of high growth and dividend contribution thus made up a smaller portion of returns (26%). The post-2000 investing period has however been a low-growth period and dividends have made up 74% of returns.
A dividend fund is a fund that holds primarily dividend-paying shares of a company. These funds will invest in top dividend paying companies that have shown steady profits and dividend increases. These will usually be large, established, high quality companies such as the Canadian big banks (ex. TD Bank) or oil companies (ex. Petro-Canada)
Dividend funds offer three main advantages:
1. Young investors will benefit from years of compounding dividend growth. For older investors, the dividends can be turned into a stable income stream.
2. Dividend funds tend to have less volatility than an equity funds because of their focus on large, stable companies.
3. For open (non-registered) accounts, dividend funds are taxed at advantageous rates (19.91% based on combined BC/Federal dividend tax rate), thus investors can keep more of their money.
This type of funds is well-suited for investors looking for conservative or moderate returns. They can also be used to compliment a more aggressive small-cap (smaller companies that offer higher growth potential) fund.