Equity income investing—alive and well
The income challenge
With interest rates still hovering near historic lows, investing for income can be more challenging than in the past, when deposit accounts and bonds yielded higher returns. Some Canadians have adjusted their vision of retirement, thinking they may now need to work longer to achieve their ambitions. But for those looking for higher return potential and who are willing to accept some additional risk, equity income investing is still alive and well.
Also known as dividend investing, equity income investing offers steady income from dividends, combined with an opportunity to participate in the market’s long-term growth potential through capital gains.
Many companies pay attractive dividends and have a track record of increasing dividend payments over time. As the pandemic fades, more companies could be able to grow their profits and increase dividend payouts, possibly drawing more investors back to equity income investing.
The potential benefits of equity income investing
Equity income strategies offer investors a potential opportunity to add regular income and capital gains to their portfolios. Dividends can be taken as income, or they can be reinvested. Reinvesting is a valuable long-term investment strategy. Over the long run, reinvested income can be the biggest overall contributor to total returns due to the compounding effect.
A look at dividends’ contribution to total returns over time
Dividend stocks suffered somewhat in 2020/21 during the Global Pandemic. Historically, however, dividends have contributed significantly to total returns. In fact, dividends have contributed approximately 32% on average to the S&P 500’s total returns since 1960, as the following chart illustrates:
Source: Morningstar, January 1, 1960 to December 31, 2019
Past performance is no guarantee of future results. Chart is provided for illustrative purposes only.
“Over the long term, a significant portion of total shareholder return for shares in the S&P 500 comes from dividends”—Craig Jerusalim, Portfolio Manager, Canadian Equities at CIBC Asset Management
How to position this in your portfolio
While equity income strategies tend to appeal to conservative, income-oriented investors, they shouldn’t be ignored by growth-oriented investors, since they can provide opportunities for potential capital appreciation and diversification.
Speak to us if you have questions about incorporating equity income strategies into your portfolio. We’re always available to discuss your unique situation and help develop a targeted investment approach using solutions that work best for you.