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As the annual pace of inflation rises, investors who depend on their portfolios to provide income may want to consider dividend paying stocks as one way to help them keep up with the rising cost of living, experts say.

Laura Barclay, a senior portfolio manager at TD Wealth, said after taxes and inflation, the yield on investments like guaranteed investment certificates and government bonds right now leaves you with a negative return on your money.

“That tells me you don’t really want to live there,” Barclay said.

“If you can tolerate that negative return you can probably just tolerate the volatility that you know a portfolio would produce in some manner.”

Inflation has always been a risk for retirees, slowly eroding the buying power of anyone on a fixed income.

And as interest rates have steadily declined in recent decades, investors looking for yield have had to take on greater risk to find investments that provide some income, but the recent spike in inflation has brought the issue into the spotlight once more.

“Inflation protection is critical,” Barclay said.

Dividend paying stocks offer protection from inflation by paying higher returns than GICs or bonds with the potential for dividend increases in the future as companies grow. Eligible dividends from Canadian companies also benefit from preferential tax treatment compared with interest income from investments like GICs, bonds or term deposits.

However, while many of the popular dividend paying companies in Canada are big blue chip companies, they carry more risk than GICs or government bonds. Stocks go down as well as up and companies can cut their regular payments to shareholders if they find themselves in tough times or decide they want to use the cash for something else.

When the pandemic struck in the spring of 2020, many energy companies that were paying rich dividends stopped as the oil price plunged. And while Canada’s big banks continued to make their regular payments, the value of their shares plunged in the early days of the pandemic and they were prevented from increasing their dividends until last month.

Lisa Applegath, a portfolio manager at CIBC Wood Gundy, said dividend yielding stocks are excellent, but even the best of them can be volatile.

“I’ve experienced it many times over my career, but if you think of ... March of 2020, even the bank stocks were down,” she said.

Applegath said if you want to consider dividend stocks you need to be able to handle the swings in value.

When evaluating dividend paying companies for an income portfolio, Applegath said she considers several aspects, including great balance sheets and growing dividends.

She warns against going down a list of dividend payers and picking the highest yielding stocks.

“That’s a no no,” she said, as that can end in trouble if a company is paying an unsustainable dividend.

Applegath said without dividend growth and assets in a portfolio that are growing it means having to use some of your capital to keep up with inflation and that is a situation that investors may not be comfortable with.

“The pain of inflation is being felt more so than we’ve ever experienced in a very long time.”

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