It’s no secret that there is a lot of concern amongst dividend investors these days; it seems that everybody and his dog in the financial press is asking (and then answering) the question: Is it time to get out of dividend-paying stocks? (Some people are even messing with their readers, including Robb, over at Boomer & Echo.)
Generally, their answers are: No, you shouldn’t dump your dividend stocks. Why? Because:
interest rates may yet stay where they are for some time, so don’t leave the party early; market timing is a mug’s game
a properly diversified portfolio is already prepared to take advantage of a rise in interest rates if and when it comes
stock picking and sector rotation are not games that most individuals can win on a consistent basis; it is far better to pick your strategy and stick with it.
That’s all well and good, but that doesn’t answer the question that I’ve heard posed around the water cooler a few times recently: If rising interest rates are ultimately a sign of a healthy economy, why are people worried about dividend stocks falling? Here’s why:
Introduced in February of 2008, Tax Free Savings Accounts (TFSA) represented the biggest change to Canadians’ personal finances in many years. Here, suddenly, was a vehicle that seems to be (and in my opinion really is) an investor’s dream: a way to invest money, and never be taxed on it; a vehicle that allows people to withdraw money at will, and then replace it again in future years (again, without tax consequences); a vehicle that is open to everybody over the age of 18, regardless of income; a vehicle whose contributions room increases every year, even when a person reports no earned income. These are all great feature of the TFSA, but their biggest advantage may be the low annual contribution limit. The low limit allows people to max out their contribution, and feel like they have control over this part of their lives. The idea that you’ve done all that you can do, that you’ve won the game you are playing, is highly motivating; it makes people want to play again and again.