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“Are High Dividend Yields Really Worth the Hype?
New investors are often drawn to the idea of investing in dividend stocks due to the promise of steady income. However, there’s a common pitfall that many fall into: the allure of high yields. It’s tempting to think that a high dividend yield is like hitting the jackpot, but seasoned investors know that an unusually high yield isn’t always what it seems. It can be more of a warning sign than a stroke of luck, signaling trouble within the company, such as deteriorating financials or challenging industry conditions that could jeopardize future dividend payouts.
The Importance of Dividend Growth
Instead of being swayed by high yields, it’s important for new investors to look at dividend growth. Companies that have a track record of consistently increasing their dividends over time signal a company’s health, profitability, and commitment to returning value to shareholders. Investing in these companies means not just keeping up with inflation, but thriving in the market.
Introducing Dividend Aristocrats
If you’re new to this concept, let me introduce you to the idea of dividend aristocrats. These elite companies haven’t just paid dividends, but have raised them year after year for a significant number of years. They’re a sign of financial strength and long-term stability.
What is a Dividend Aristocrat?
A dividend aristocrat is not just any company that pays dividends; it’s one that has a distinguished history of not only maintaining but also increasing its dividend payouts over a significant period of time. In the United States, a company is designated as a dividend aristocrat if it has increased its dividend for at least 25 consecutive years, showing a quarter-century commitment to growing dividends and reflecting their ability to perform through various economic conditions. In Canada, a company can be considered a dividend aristocrat if it has increased its dividends for just five consecutive years, showing a proven ability to increase their payouts to shareholders.
A Dividend Aristocrat ETF to Consider
Managing a portfolio of individual dividend aristocrat stocks can be quite a task, which is where the convenience of an ETF comes in. An ETF provides a diversified portfolio of dividend aristocrats, sparing the heavy lifting of portfolio management. One such ETF is the iShares S&P/TSX Canadian Dividend Aristocrats Index ETF (TSX:CDZ), which currently holds around 90 Canadian stocks. Each of these stocks has not just paid dividends but has also increased them for at least five consecutive years, meeting the Canadian criteria for being considered dividend aristocrats. By investing in CDZ, you get the benefit of a ready-made and diversified portfolio of reliable dividend-growing companies, without the hassle of doing all the management yourself.
In conclusion, while high dividend yields may seem attractive, the smart move is to focus on dividend growth and look for companies that consistently increase their dividends over time. This approach can provide more stability and long-term potential. And for those new to dividend investing, an ETF like CDZ might just be the perfect way to gain exposure to a diversified portfolio of dividend aristocrat stocks. Happy investing!”
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