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OTTAWA (GlobinvestorGOLD)—The dreaded b-word may spring to mind when you hear about how I would invest a $200,000 windfall. To the uninformed, dividend stocks are indeed boring.
To me, they're as exciting as all get out. Seriously. Well-chosen dividend stocks would pay me a regular income, offer excellent long-term growth potential, and have tax benefits as well. Call them a triple play.
The strategy for investing the $200,000 would be to create a mix of high-yielding dividend stocks that are of interest mainly for the income they pay and lower-yielding blue chips that have a good chance of increasing their dividend payouts over time and growing their share price. I'd shoot for an average yield of 3 to 4 per cent, which would mean $6,000 to $8,000 annually in pre-tax cash (we'll get to the after tax amount momentarily).
An easy way to go hunting for dividend stocks is to use the filter function on GlobeinvestorGOLD. For my purposes, I set up a search to go after common shares listed on the Toronto Stock Exchange that yield more than 3 per cent. Among the higher-yielding stocks I found were:
Just for the sake of an example, let's say I put $11,000 into each so that high-yielding stocks accounted for one-third of my dividend portfolio.
For the remaining two-thirds, I want lower-yielding companies that have a solid track record of share price growth, and of raising their dividend over time.
The banks are an obvious choice here. I'll go with:
Next, I'll add:
Into each of these stocks, I'll invest $22,333.
The point of buying these lower-yielding stocks is, first, to benefit from a rising share price over the years. Each has demonstrated the ability to produce long-term gains for shareholders and, in fact, most of the group have been strong performers in the past few years. Just as importantly, these stocks are financially strong enough that they've managed to increase their dividends periodically over the years. Every time a company raises its dividend, the yield I get on my initial investment rises a bit.
Throw these 12 companies together and I get an average yield of 3.4 per cent, or $6,800 a year.
How much is that in after-tax dollars? Here we arrive at the tax argument in favour of dividends, which hinges on the federal dividend tax credit. The net impact of this credit is to reduce your marginal tax rate on dividends well below that of interest income. In the top tax bracket, the marginal rate on dividends ranges from 24 per cent for residents of Alberta to 37.3 per cent for Newfoundlanders. The comparable tax rates on interest income would be 39 per cent and 48.6 per cent, respectively.
On my $6,800 in income, let's apply a marginal tax rate of 31 per cent, which is halfway between the Alberta and Newfoundland extremes. Net result: I get to keep $4,692 of the $6,800 received in dividends, instead of an estimated $3,808 in the case of interest income.
Dividend cheques would be rolling in all year long. I'd bank them and at the end of the year I'd blow the money on something extravagant.
Told you dividends were exciting.
Rob Carrick has been writing about personal finance, business and economics for more than 12 years.