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What are the advantages of dividend investments?

When the market gets tough and shaky, investors who favour equities with less volatility often head for dividend investments.

Investments that pay dividends are considered more conservative and less risky than livelier equity companies. High dividend-paying stocks, while often offering safety and income, tend to lag in a growth market and go in and out of favour. During volatile markets and past market corrections, dividend-paying investments have outperformed stocks that don’t pay a dividend. Recently, the average dividend mutual fund outperformed the one, three, five, and 10-year return of equity funds. An advantage of dividend stocks – along with lower risk and volatility – is that dividends paid are tangible cash. Once a company has given a dividend, it’s yours and it won’t diminish in a bear market. Tax bites Dividends are taxed as income for investors and corporate profit to companies. If you are in a lower-income bracket, your dividends will be taxed at a higher rate than capital gains. Choose quality Not all dividend-paying companies are created equal. Beware of companies that offer an amazing dividend yield. If it sounds too good to be true, it probably isn’t. That said, there are many quality companies that offer stable payouts and high dividend yields in the range of 3 to 5%. Doing your own research and seeking advice from an experienced financial adviser is your best bet in choosing a dividend stock or mutual fund. While dividend investments offer slow-and-steady growth with minimized risk, they are just one investment tool in a balanced portfolio. Financial planners stress that the greatest safety net comes from spreading your risk among stocks, bonds, and cash or short-term investments. Loading up on dividend-paying stocks is just as risky as concentrating on growth stocks during the tech-craze phase.