Get Paid to Wait

The headlines continue to report bad news. Corporate bailouts, high unemployment figures and ballooning government deficits, not to mention swine flu, make the average Canadian wonder why they should invest in equities at all. But what are the alternatives? Interest rates are at historic lows. After taxes and inflation you are spinning your wheels and going backwards by saving in guaranteed investments.

Given the volatility and negative news we have witnessed over the past year, there are many who wonder if investing in equities is really worth it. Here’s a strategy that can prove to you that patience can really pay, with dividends.

Yes, equity prices did fall and hit bottom last March. However, the sky did not fall and we appear to be recovering nicely from the lows of last spring. Meanwhile, many mutual funds invest in businesses that have continued to pay dividends. Yes, some businesses have cut dividends while others have actually increased their dividend payout to shareholders.

But, let’s first explain what a dividend is and how we can use this information to our advantage. The cash flow or revenue of a company comes from the sale of goods and services. From this income the company pays expenses such as salaries, materials, rent and other operating expenses. The remainder is the amount that the company has to claim as income. The government takes a share in tax, and the leftover sum is either used by the company to re-invest in more modern equipment or buy supplies etc. The money that is left over after expenses, taxes and re-investment is what the company has to reward its shareholders by way of a dividend.

If you think about it, it’s very similar to the concept of cash flow management at a personal level. You earn income from employment. You pay your living expenses and taxes, and then you can either save or spend the remainder. The amount you save is your investment in your future. The amount you spend is your personal dividend to yourself. The problem is that over the past decade or so, people have been spending more than they could afford and not re-investing in their future.

Now let’s get back to our discussion on dividends. Equity prices have fallen on an abundance of good quality businesses with superior products and services that continue to pay dividends. These businesses are well managed and stand to benefit greatly as the economic recovery takes hold. Many dividend rates on these companies are currently in the 3-5% range, and in some cases higher. Have you looked at guaranteed investment rates lately? It’s not easy to find a guaranteed rate in the 3-5% range.

Our investment strategy is simple. Always keep your short-term savings in a safe and liquid investment. Have faith that there will be an economic recovery; there always has been. Only invest in equities with your long-term savings. This allows you to have patience and even invest more during market declines. Consult with a trusted advisor who can coach you through troubled times. And get paid to wait.