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3 Massive Advantages to Becoming a Dividend Investor

One of the most fun things about getting rich is that there are an infinite number of ways to get there.

Some folks have built their fortune in real estate. Others have started their own business. The tech world is filled with employees who got handsomely rewarded for taking a chance on a promising start-up. And there are millions of so-called millionaires next door — regular folks who scrimped and saved their way to a very impressive net worth.

Even among stock market investors, there are many different approaches. Some folks will swing for the fences and invest in growth stocks. Value investors are constantly checking 52-week low lists for out-of-favour stocks. Some investors will do nothing but invest in merger arbitrage. And, of course, there are millions of dividend investors out there.

There’s a reason why so many investors have chosen to put their savings to work in Canada’s top dividend-paying stocks. Here are three that are crucially important. They might even change the way you invest.

Tax breaks

The dividend tax credit was put into place to encourage Canadian investors to keep their investment dollars at home. This helps stimulate the local economy.

Some smart investors have taken it a step further. If all you report is dividend income, you can earn up to $55,000 per year without paying a nickel of taxes — depending on where you live. Some provinces offer zero taxes on that amount, while others offer steep discounts. Still, no matter where you live, the truth is, dividends are taxed much better than other sources of income, like employment income or interest.

BCE Inc. (TSX:BCE)(NYSE:BCE) is one of Canada’s finest dividend stocks. It’s our nation’s largest telecom with millions of wireless and wired customers. It also owns some of Canada’s best media assets. Shares pay a 4.9% dividend.

It depends on your individual tax situation, but somebody looking to get a 4.9% after-tax yield would need a 7-8% yield on an interest-bearing security. That’s tough to find in 2017.

Outperformance

Study after study has proven it. Not only do dividend-paying stocks outperform the market as a whole, but they do so while being less volatile than the overall market. What a fantastic combination.

There are situations where dividend stocks blow up and cut their payouts. That’s inevitable. But investors can protect against that by stuffing their portfolios full of a wide variety of dividend payers.

Take Inter Pipeline Ltd. (TSX:IPL) as an example. The company’s main business is transporting bitumen from the oil sands to refineries close to Edmonton. It also has conventional oil pipelines, natural gas pipelines, and gas-storage facilities. Most of its assets are in Alberta, which is a constantly understated plus. Shares pay a 5.8% dividend.

In the last decade, Inter Pipeline has returned 19.1% per year — assuming dividends were reinvested — while only being 39% as volatile as the market on the whole. Oh, and the price of oil is down approximately 25% in that time.

What a terrific way to invest in such a volatile commodity.

Income

Certain intellectuals are unimpressed with dividends, saying there’s virtually no difference between a company that retains all of its earnings and a company that pays out a dividend. In fact, paying a dividend is inefficient because it exposes those earnings to double taxation — once when the profit is earned and once when investors pay their own taxes.

I’m the first to admit those people have a point. But the fact of the matter is that it feels good to get paid every quarter. This feeling matters little to the top minds of finance. They know better. But it matters a great deal to regular folks.

What many investors do is focus on the income. As long as a company continues to meet dividend expectations, it’s easy to avoid selling. Even if the share price languishes.

The bottom line

Investors can choose different ways to get rich. Half of the fun is choosing the method. There are so many opportunities out there.

Dividend investing might be the best opportunity of all. It really is that simple.

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Fool contributor Nelson Smith has no position in any stocks mentioned.

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