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It was the best of times for dividend investors

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dividend In my last post, I discussed the complicated world of dividend payments.

(It may help to refer to my last post on dividend-payers and its predecessor before reading this new one.)

Continuing from the previous, when it comes to dividend payments, what we have to remember is:

Since the dividend payments have already been paid and taxed (if held outside a registered account), then your adjusted cost base (ACB) for accounting purposes, and, more importantly, for paying taxes on your investments, already takes the dividend into consideration.

What the charts and ACB don’t tell you

When you look at charts, since they don’t add the dividend amounts on to the listed return, it looks like you made less than you did. You have to take the return on the investment plus the dividend it paid to get a real picture of your investment.

In a great year, like this last year, it doesn’t matter as much, but in years where the stock only appreciates a little, say 1 or 2 per cent, a 4 per cent dividend looks great.

If you bought 100 shares, originally, and reinvested your dividend payment each time it was made, those payments will become part of your ACB. Let’s use a very simple example to review how this works.

Okay, one more time, from the top

If you held 100 shares and received four dividend payments that equalled 1 share each, you’d now hold more shares:

100 + 1 + 1 + 1 +1 = 104 shares

If the share / unit price were $62, your investment would be: 104 shares x $62 = $6,448. The dividends paid in 2013 will be taxable. In the example above, three of the dividend payments will be taxable on your 2013 tax statement while one of them would have been paid the year before since it was paid in 2012. (Again, this is only true if the investment is held in a non-registered account.)

In Paid for faith and paid to wait: Have you thought about this regarding your dividend paying investments?, I discussed what happens with dividend-paying stocks. Key is the way dividends are accounted for (in a non-registered account, e.g., outside of an RRSP or TFSA).

When a dividend is paid (refer back to the example above), it becomes part of your cost when reinvested because you have bought new shares or units. So, in the above example, where you hold 104 shares, all of those shares are you’re ACB.

$6,448 becomes your ACB. Not the $6,200 of your original investment. The $248 of dividend payments are added to your cost.

This works in your favour at tax time:

If held outside of a registered account, the dividend payment is tax preferred and you’ll pay a lower rate of tax than if it were normal income. For example, you’ll pay a higher tax rate on your salary, on GICs and other deposit investments which pay out normal income.

Let’s take a quick look at history … Way back in December 2011, I posted about the favourable climate for dividend-payers – especially U.S. dividend stocks. You’d be a happy investor right now if you’d made investments in quality dividend stocks back then — U.S. or Canadian.

It was the best of times (for dividend investor returns): the irrefutable metric of the past

As always, the future is unwritten, but the past is fact because we can measure it. I began this series of posts a while ago. If we update it to the time of writing, we find:

One of the most conservative of indices, the Dow Jones Industrial Average (DJIA) returned approximately 33 per cent since that time. The broader S&P 500 returned about 47 per cent (although the index does have a lower dividend payout and is somewhat ‘growthier’). Still, it was indeed one of the best of times for dividend-payers.

Royal Bank? About 62 per cent.

Even more impressive? Those returns quoted above don’t include dividend payments. Your return including those payments would’ve been even higher.

ry inx djia

Here’s a chart showing dividend activity for Royal Bank over the same period of time:

ry div

For Canadian investors, it might be interesting to consider that the Canadian dollar dropped in value over this time as well. If you held U.S. investments, the strength in the U.S. dollar added to your return on those investments. Since its recent peak in July 2011, the Canadian dollar has dropped from $1.05 U.S. to about 90 cents U.S. (a drop of approximately 16.7 per cent if you want your 90 cents to grow back to 1.05).

The change in currency added about 6 per cent to the DJIA’s return for Canadian investors and about 8.6 per cent to the S&P 500.

Not bad.

Want to contact me? Go here.

creative-commons.png

This work and all work on this blog is licensed under a Creative Commons Attribution-ShareAlike 3.0 Unported License.
NB: Royal Bank stock used for illustrative purposes.

Image: Flickr, Daily Dividend.

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Written by johnrondina

February 24, 2014 at 12:22 pm

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