Why You Shouldn’t Judge a Stock by Its Price

When you account for dividends, Power Financial Corporation (TSX:PWF) begins to look more like the best stock an aspiring Canadian retiree could own.

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Investing isn’t just about capital gains. Indeed, we don’t want asset price declines to erode the value of our initial investments; nevertheless, we can’t only focus on price-performance when judging the overall success of stock on an exchange.

Dividends matter too.

Take a look at Power Financial Corporation (TSX:PWF) as an example. The price of shares in Power Financial has increased by just 730% since 1995. In January 1995, the stock traded for $3.59, and today the stock sells for almost $30 per share at writing.

Calculate expected dividend returns

While no Canadian investor should turn their nose up to a 30% average return per year, it’s far from being the best-performing stock in terms of price on the TSX in the past 25 years.

When you take dividends in account, however, the stock begins to look more like the best stock an aspiring Canadian retiree could own.

Power Financial Corporation issued its first dividend in August 1997 at an impressive $0.26 per share. Today, Power Financial gives back to shareholders $0.456 for each share every quarter. The dividend yield is 6.14% at its current price.

This means that Canadians who invested in this stock 25 years ago earned over a 30% return every year once accounting for dividend payments. If the shareholder set those dividends to reinvest into stock, the shareholders received even higher profits from compounded interest.

Investors can’t reap the benefits of compound interest from unrealized capital gains. Capital gains can disappear just as easily and quickly as they accrued.

Shareholders in Shopify learned this the hard way last month.

Develop a long-term mindset

The best investment strategy is long-term investing. Investing and forgetting will help you earn the most from your cash. The trick is to pick stocks you know you can count on for the next 25 years.

Instead of betting on new, unprofitable companies, Canadian investors should be looking at those perennial corporations like Power Financial that they know will be just as profitable 30 years from now as they are today.

Insurance companies like Power Financial and even big banking institutions are the best option for Canadians who dream of one day retiring. Not only do these stocks typically give out high dividends to shareholders, but the price on these stocks also remain reliably stable throughout the years and even offer above market average returns throughout a lifetime.

Ditch those high fee brokerage firms

Insurance companies and big banks are well-connected in the financial sector so they can best decide how to invest your money. Rather than paying high fees for a brokerage firm to manage your savings and rack up high fees from over trading, it’s a much better option to entrust your hard-earned cash to banking and insurance stocks.

Retirement and long-term savings are more comfortable to manage than many novice investors realize. It isn’t about being able to move along with the market.

It’s about finding those established big names that offer the best dividends and forgetting about the account.

Many times investors freak out about the latest financial crisis or the next recession and pull their money out due to short-term concerns when the reality is different. Those circumstances are more than likely temporary.

Instead, Canadian investors should focus on maintaining emergency savings, so they don’t have to worry about short-term liquidity risks in the stock market.

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 Debra Ray has no position in any of the stocks mentioned. Tom Gardner owns shares of Shopify. The Motley Fool owns shares of Shopify and Shopify. Shopify is a recommendation of Stock Advisor Canada.

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