Dividend stocks were the wallflowers of the stock market for the past few years, as spiking interest rates and a sizzling tech sector caused investors to shower their affections elsewhere.With the Bank of Canada having lowered interest rates three times – including a quarter-point cut this week – and the U.S. Federal Reserve expected to kick off its easing cycle on Sept. 18, my modelposted a total return of about 10.8 per cent. That compares with a gain of about 7.
Dividends can play a key role in that regard. When a company sends you cash every quarter, or every month in some cases, it’s easier to resist the urge to do something you might later regret.My model portfolio is a case in point. As of Aug. 30, the portfolio was valued at $166,017.66, representing a total return of about 66 per cent since Oct. 1, 2017, when I launched it with $100,000 of virtual cash. On an annualized basis, the portfolio has returned 7.6 per cent since inception.
The increase in income has been substantial. At inception, the portfolio was generating $4,094 of cash annually based on dividend rates at the time. Now, thanks to scores of dividend increases and regular reinvestments of cash to buy additional shares, the portfolio’s annual income has soared to $7,886 – an increase of roughly 93 per cent.
And there is almost certainly more to come. Between now and the end of the year, I expect dividend increases from the utilities Fortis Inc. and Emera Inc.In recent months, more than $1,200 of cash has accumulated in the model portfolio. Reinvesting dividends is critical for building wealth, as it puts the power of compounding on your side. Some investors enroll their stocks in a dividend reinvestment plan to make the process automatic, which is a great strategy.