FP Answers: Is there ever a time when dividend investing doesn’t make sense?

financialpost.com:

By Julie Cazzin with Aman Budhwar

Q: What role do dividends play in a balanced portfolio? What are some dividend-investing approaches or strategies? And is there ever a time when dividend investing doesn’t make sense for an individual equity investor?

FP Answers: Simon, it may come as a surprise to learn that, historically, dividends do much of the heavy lifting regarding long-term equity returns. Using data from the United States stock market from 1900 to 2016, research shows capital gains supplied only a third of total returns while reinvested dividends supplied the rest.

A more recent study found that over a 123-year period, one U.S. dollar invested in the stock market with dividends reinvested would have grown 2,024 times in terms of purchasing power, well above the 35-fold rise in prices during this period.

As you can see, dividends can play a major role in a balanced portfolio for several key reasons:

Income generation: Dividends provide a consistent stream of income to investors that may be especially important for retirees or those seeking regular cash flows from their investments.

Risk management: Dividend-paying stocks, particularly those from established and financially stable companies, can be less volatile than non-dividend-paying stocks. A regular and growing dividend along with a strong balance sheet clearly demonstrate a company’s ability to generate cash from operations. The steady income from dividends can help offset losses during market downturns.

Dividend growth: Some companies have a history of increasing their dividends over time. Investing in these companies can provide a growing stream of income that can help investors maintain their purchasing power in the face of inflation.

Tax efficiency: In