If you could only choose one stock index for your investments and put performance above all, it would have to be the S&P 500 INX-I.
The S&P 500 soared about 33 per cent in the 12 months to Nov. 30 on a total return basis, which includes dividends as well as share price gains. With its 32-per-cent tilt to technology, the S&P seems like an index built for these times. Two prime drivers of S&P 500 returns this year are the tech and AI stocks such as Palantir Technologies Inc. PLTR-Q and Nvidia Corp. NVDA-Q.
A comparable performer than the S&P 500 this year is the S&P/TSX Canadian Dividend Aristocrats Index TXDC-I, with all of 1 per cent of its assets in information technology. The dividend aristocrats index made 33.5 per cent for the 12 months to Nov. 30 on a total return basis. We are very much in a bull market for everything period, but this return nevertheless stands out as an example of the power of dividend investing.
It’s fashionable these days to critique dividend-focused investing strategies. The arguments are that you sacrifice growth and limit your exposure to dynamic companies in sectors like AI, where dividends are rare. All of this is true. Dividend investors may realize lower total returns over the long term than a more growth-oriented approach like buying an exchange-traded fund tracking the S&P 500 Index.
But dividend investing is about putting income ahead of higher share prices. Ideally, the two combine to produce a nice total return. But if a dividend investor’s gains are mostly income, that would be fine.
Income via quarterly cash payouts was the only bright spot for a bunch of dividend stocks in recent years. As interest rates increased and then plateaued at high levels, investor attention turned to cash-equivalent investments with strong returns and low risk. Dividend yields of 5 to 7 per cent or more were available from blue chip stocks, which is way beyond the usual.
Falling rates have rekindled interest in dividend stocks and driven up returns for the dividend aristocrats index. Dividend investors, enjoy the moment. Just now, you’re pulling in dividend income with a tax advantage in non-registered accounts, plus big share price gains. The S&P 500, with its flashy tech stocks, cannot keep up.