Put Investment Income Before Price Growth When Buying Stocks

Markets rarely move in a straight line, though a long-term chart of the S&P 500 can give the impression of steady, uninterrupted growth. That appearance masks a great deal of short-term volatility: steep rallies are often followed by sharp pullbacks, and year-to-year performance can swing widely. Yet when assessing returns over decades, it helps to remember where the gains come from.

As of Dec. 31, 2021, the annualized total returns for the TSX and the S&P 500 (measured in Canadian dollars) were 9.6% and 11.7% respectively. Those figures include both price appreciation and dividend income. While share price movement tends to attract the most attention—especially in volatile years—dividends represent a reliable and often underappreciated component of total stock returns.

Dividend income can act as a stabilizer in portfolios. Unlike short-term price swings, companies that pay dividends create a steady stream of cash that investors can reinvest, live off, or use to smooth portfolio volatility. For many long-term investors, the predictability of dividends is more valuable than attempting to time capital gains.

Sam Stovall, chief investment strategist at CFRA Research, makes a useful comparison: investors often behave like traders, concentrating on short-term price moves, rather than like landlords, who focus on steady rental income. “A landlord’s biggest concern is ensuring the uninterrupted stream of monthly income, not the property’s near-term price fluctuation,” he writes. Applied to equities, this perspective encourages careful attention to a company’s ability to sustain and grow dividend payments over time.

If monitoring company financials and dividend sustainability feels like too much ongoing work, there are simpler ways to pursue a dividend-growth strategy. Exchange-traded funds (ETFs) that screen for companies with long records of dividend increases provide a convenient, diversified approach. For example, one ETF follows the S&P 500 Dividend Aristocrats criteria, allowing only companies that have increased cash payouts for 25 consecutive years. Similarly, Canada offers funds that track the S&P/TSX Canadian Dividend Aristocrats index. Many holdings in these strategies have histories of consistent dividend growth, with some companies raising payouts for decades.

Why consider dividend-growth ETFs or dividend-focused stocks? Key advantages include:

Predictable income: Companies that consistently increase dividends demonstrate a commitment to returning cash to shareholders, which can provide a dependable income stream.
Compounding: Reinvested dividends accelerate long-term portfolio growth through compounding, especially when dividends rise over time.
Lower volatility: Dividend-paying companies, particularly those with long dividend-growth histories, tend to be more established businesses with steadier cash flows.
Discipline and quality screen: Dividend-growth strategies often screen out highly cyclical or unprofitable firms, favoring companies with stronger balance sheets and predictable earnings.

That said, dividends are not risk-free, and historical track records are not guarantees of future payouts. When evaluating dividend stocks or dividend-focused ETFs, consider these practical metrics:

Payout ratio and cash flow: Assess whether a company’s dividends are supported by sustainable earnings and free cash flow rather than one-time gains or excessive borrowing.
Balance sheet strength: Moderate debt levels reduce the likelihood of dividend cuts when revenue is pressured.
Dividend growth history: A long record of consecutive increases is encouraging, but examine recent trends and the business context.
Sector and concentration risks: Some dividend strategies overweight financials, utilities, or energy; ensure sector exposure matches your risk tolerance.
ETF costs and methodology: If using an ETF, review the expense ratio, tracking index rules, yield, and turnover to understand how the fund implements its dividend-growth mandate.

For many investors, dividend-growth ETFs strike the right balance between simplicity and discipline. They remove much of the research burden by applying objective screens, provide instant diversification across multiple dividend-growing companies, and often include a mix of industries that helps buffer sector-specific downturns.

How to implement a dividend-focused approach

Decide whether you want income now or total-return growth through reinvestment. Reinvesting dividends typically boosts long-term returns.
Choose between individual dividend stocks and ETFs. Individual picks require ongoing monitoring; ETFs offer a more hands-off experience.
Compare ETF options on yield, expense ratio, index methodology and historical dividend-growth track records.
Monitor the portfolio periodically for dividend sustainability and re-balance to maintain your target allocation.
Understand tax implications for dividends in your jurisdiction—rules vary and can affect after-tax returns.

In short, if you find yourself distracted by daily market headlines, a dividend-focused mindset can help re-center your approach on long-term income and total returns. Thinking like a landlord—prioritizing a steady stream of cash flow and the financial health of the assets you own—can reduce the urge to trade on short-term price movements and keep your plan aligned with long-term objectives.

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