Lower Your Risk by Buying Dividend Stocks

Dividend stocks that pay shareholders regular income are a way to lower the cost basis over time. Dividend-growth stocks such as National Bank of Canada (TSX:NA) and Canadian Utilities Limited (TSX:CU) are good choices.

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You can view dividends that you receive from your dividend stocks as paying back a portion of your investment.

For example, if you bought 100 shares of National Bank of Canada (TSX:NA) in January 2015 at $47 per share, you would be sitting with $3 of unrealized loss. You would be in the red for that position.

However, you would have received three quarterly dividends from the bank year-to-date. The dividends amount to $1.54 per share, so you would have received $154. Now, that’s not enough to compensate for your unrealized loss, but if you haven’t sold, you haven’t actually lost any money yet.

By receiving the $1.54 per share dividend, it’s as if you’ve reduced the money you have invested in the stock to $45.46 per share instead of $47. Assuming you bought the shares in a tax-free savings account, there would be no tax consequence from receiving the dividends.

Dividend stocks work especially well in the long term

It helps to have a long time horizon in investing because in the short term, stocks go up and down. No one can know when it’ll go up or down next; we just know that in the long term, the stock price eventually follows the business performance.

With dividend stocks, you essentially get paid to wait for the shares to go up. Actually, if you build a big enough portfolio of quality dividend stocks, you might never need to sell your shares for gains because you can receive the money that you need via dividends.

Companies typically don’t start paying a dividend unless they expect to be able to keep paying them. Of course, that isn’t always the case. That’s why it’s better to stick with quality stocks that earn more stable earnings if you care a lot about the dividend.

Dividend-growth stocks are safer

There are dividend stocks and there are dividend-growth stocks. The latter typically increases dividends every year. In that sense, they’re less risky than stocks that maintain their dividends but don’t grow them. Businesses can only continue increasing dividends year after year only if they become more and more profitable.

So, if you care about the safety of your dividends, it’s generally safer to buy stocks with track records of growing dividends than those that don’t. For example, Canadian Utilities Limited (TSX:CU) has the longest streak of growing dividends in Canada. It has increased dividends for more than 40 years.

In summary

Dollar-cost average into dividend-growth stocks that generate steadily growing dividends. They are the kind of stocks that create wealth for you over time.

Other than the top Canadian utilities, you can also explore the top Canadian banks, telecoms, and energy infrastructure companies such as Royal Bank of Canada, BCE Inc., and TransCanada Corporation.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Kay Ng owns shares of CANADIAN UTILITIES LTD., CL.A, NV, Royal Bank of Canada (USA), and TransCanada.

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