When investing, think like a landlord

The annualized total returns for the TSX and S&P 500 (in Canadian dollars) were 9.6% and 11.7% as of December 31, 2021.

It is impressive, but the short-term volatility of the market can be quite extreme, and this year is a good example. The annual ups and downs of the market can lead investors to focus more on capital appreciation and depreciation. But stock returns come from both capital growth and dividend income, the latter being more predictable.

You may want to heed the advice of Sam Stovall, chief investment strategist at CFRA Research in New York. Stovall argues investors are too focused on the price appreciation of stocks and forgetting the other reason they hold equities: for income. In a recent note he says investors too often have the mindset of a trader when they should be thinking more like a landlord.

“A landlord’s biggest concern is ensuring the uninterrupted stream of monthly income, not the property’s near-term price fluctuation,” he writes. And like a landlord, investors need to pay close attention to a company’s books to check up on whether it can afford to maintain or raise its dividend.

That might sound like more work than a DIY investor is comfortable with, but Stovall notes there is a simple way to achieve this: own the S&P 500 Dividend Aristocrats ETF (NOBL). Only companies that have raised their cash payouts in each of the last 25 years are permitted in this exchange-traded fund (ETF), and others like it. Most of the holdings have increased dividend payouts to investors for more than 40 years. You do not need to look to the U.S. to execute this type of strategy either. In Canada there is the iShares S&P/TSX Canadian Dividend Aristocrats Index ETF Aristocrats ETF (CDZ).

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