Climbing your way up the financial food chain

Here’s a way you can get capital preservation with dividends

Notwithstanding economic conditions, turmoil in Europe, and an imminent US budgetary showdown there are plenty of good companies in Canada making profits, and paying healthy dividends.

So why not invest in them? Certainly the strategy has ‘paid dividends’ in the past. Find profitable companies with good prospects for future profitability, who are willing to share that profit with their investors, and buy their common shares. Banks, for example, may have seen their share prices fall during the 2008 financial crisis, but for the most part still maintained their dividends.

But are they immune from another 2008-style crisis? In the long run, maybe — probably in fact. But as global events unfold investors should be aware that investing in even the largest, seemingly most secure and profitable dividend-paying Canadian stocks could lead to some tense moments going forward.

If you own these types of stocks, you have two choices: keep them, confident that they will weather even the severest of storms — knowing that if their prices do fall, they will eventually recover, and in the meantime you still receive the dividend. You get paid to wait, as they say.

Or, you can look for alternatives: investments that offer a decent yield that are less susceptible to market volatility.

Depending on your circumstances either is a sensible investment strategy. It depends on a number of factors including income requirements and time horizon. But most importantly it depends on how you feel about market volatility. In a nutshell, do you need the stress and can you handle it?

If you are not sure, here is an alternative. Why not consider preferred shares? In many cases the dividend is higher, and at the very least is more secure, as companies are required to meet their obligations on preferred shares before they can pay out dividends on common shares.

On the downside, preferred shares have no claim on future profits of a company other than an increased assurance of receiving the stated dividend. As such there is considerably more upside potential with common shares in a best-case scenario.

But here is the flipside: preferred shares are considerably more secure on the downside.

Preferred shares are not for everyone, as factors such as taxation and potential impact on government retirement benefits should be considered. But if your primary investment concern is preservation of capital, then they are well worth considering as part of an overall tax-efficient income strategy.

 

 

Feel free to call or e-mail for more on this topic, or visit  www.jimgrant.ca for info on upcoming presentations on this or other topics.

 

 

 

Jim Grant, CFP (Certified Financial Planner) is a Financial Advisor with Raymond James Ltd (RJL). The views of the author do not necessarily reflect those of RJL. This article is for information only. Raymond James Ltd. is a member of Canadian Investor Protection Fund.  For more information feel free to call Jim at (250) 594-1100, or e-mail at :jim.grant@raymondjames.ca” jim.grant@raymondjames.ca. and/or visit www.jimgrant.ca.

 

 

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