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Our savings are worth less in the future. $1,000 today will be worth much less in 10 years. Assuming a 3% inflation rate, $1,000 today will be worth only $744 a decade from now. Therefore, it is a smart move to invest excess cash. The goal is to at least keep pace with inflation and thus maintain your purchasing power. Cash that you don’t need now but plan to spend within the year can be invested in short-term corporate bonds, money market funds, and short-term GICs to earn more interest income. raised.
If you have a long-term investment horizon, you can explore dividend investments in stable companies. Assuming a 3% inflation rate, you can double your purchasing power on a 6% annualized return on your investments.
Example of a Fortis share
Fortis (TSX:FTS)(NYSE:FTS) is one of the best dividend stocks for beginner investors to get started with dividend investing. Over the past decade, Fortis shares have generated total returns of around 9% per year. During the period, it grew its earnings per share (EPS) and dividend per share (DPS) by approximately 4.4% and 5.9% annually, respectively.
It’s not such a safe investment to buy now, though. Because it grew its dividends at a faster rate than its earnings, its payout ratio went from 69% to 79%. Additionally, the stock’s valuation has gone from a price/earnings ratio of around 19.5 to 24 times. Lately, it seems investors have been piling into low-risk stocks, including Fortis. New investors should be cautious and wait for a decline in the regulated utilities stock to at least the $58 per share level before reconsidering.
Sun Life shares are better valued
sun life (TSX:SLF)(NYSE:SLF) looks like a better value today for a dividend yield north of 3%. Specifically, at $68.56 per share at writing, it yields 3.85%. Since 2012, the life and health insurance company has increased its EPS and DPS by approximately 8.8% and 4.8% per year, respectively. Over the period, it generated total returns of around 15% per year. His payout rate is estimated at around 43% this year. At around 11.3 times earnings, the dividend-paying stock is reasonably valued and should be able to increase its dividend by 5-7% per year.
Last month, Michael Sprung chose Sun Life as one of his top picks on BNN:
“Sun Life has a very strong financial and management team. A rising interest rate environment will benefit the business. He is able to consistently increase his profits above his target of 8-10%. The catalyst for the share price increase could come from its improved US operations. We expect dividend increases in the future.
Michael Sprung, Chairman of Sprung Investment Management
The Takeaways from the Foolish New Investor
The key idea is to buy stable, growing companies with secure dividends when trading at reasonable (or advantageous) valuations. You don’t want to pay too much for stocks, or your investment could be stuck with low to negative short-term returns. Even with a long-term investment horizon, you still want to put every dollar in your savings to good use.
Beneficial valuations generally do not occur unless there are market-wide corrections, which are often accompanied by heightened macroeconomic uncertainties. At such times, it would be best to shop around for stocks with solid dividends to invest in for the long term.