Albert Einstein is often credited as describing Compound Interest as the eighth wonder of the world. Here is a simple example:

Start with $10,000. And invest $1,000. Annually ($483.33 per month) compounding at 6% annually for 20 years grows to $487,717.

That is a mathematical truth, and it is impressive. However, we can improve on this.

What if we invest in something that regularly increases the rate of return and on top of that the return is taxed more favourably than interest income? I am of course talking about investing in top quality, Canadian companies which pay dividends.

CIBC‘s Ian de Verteuil writes in “It’s Raining Dividends in Canada”. (CIBC Equity Research, May 7, 2023) From the end of 2019 to today, S&P TSX Dividends paid have increased by 33%. Dividends made up 30-40% of overall Canadian Equity returns over the past several decades.

In addition, the eligible dividends of Canadian Companies are taxed more favourably than interest income. The after-tax return on TSX dividends is 50% higher than the same return on a 10-year Government of Canada Bond even after the increases in rates over the last year.

The most stable dividend payouts continue to be in the Financial, Utility and Communications sectors. Combined these sectors have a less than .04 % annual record of dividend decreases since 2006.

Returning to our friend Albert Einstein and the miracle of compound returns, most of these companies offer Dividend Reinvestment Plans (DRIPs). You can have your dividends reinvested each quarter if you do not need the cash flow. Still more reason to include the best quality, dividend paying companies in your investment portfolio.