Discover the best ways to improve your investing results—and this includes investing in the top U.S. dividend stocks

Companies pay dividends to attract shareholders and reward them for owning stock in the corporation. It’s a long-established practice.

Dividend-paying stocks, including top U.S. dividend stocks, can contribute a significant portion of the wealth you can expect to gain over the years. History tells us that investors who downplay or ignore dividends are robbing their portfolios of substantial earning power.

However, not all dividend-paying stocks offer equal prospects for investors. Here are key traits and risks for you to watch out for when picking the top dividend stocks for your portfolio:

True Blue Chips pay off Learn everything you need to know in 'The Best Blue Chips for Canadian Investors' for FREE from The Successful Investor. Canadian Blue Chip Stocks: Bank of Nova Scotia Stock, CP Rail Stock, CAE Inc. Stock and more.  I consent to receiving information from The Successful Investor via email. I understand I can unsubscribe from these updates at any time.

Invest in top U.S. dividend stocks because of their superior investment quality

Some good companies reinvest profits instead of paying dividends. But fraudulent and failing companies hardly ever pay dividends. So, if you only buy stocks, including top U.S. stocks, that pay dividends, you’ll automatically stay out of almost all of the market’s worst stocks. For a true measure of stability, focus on companies that have maintained or raised their dividends during economic and stock market downturns. These firms leave themselves enough room to handle periods of earnings volatility. By continually rewarding investors, and retaining enough cash to finance their businesses, they provide an attractive mix of safety, income and growth.

Invest in top U.S. dividend stocks with a history of success

One of the best ways Successful Investors pick quality U.S. dividend stocks is to look for companies that have been paying dividends for at least 5 to 10 years. Companies can trump up quarterly earnings, issue press releases to appear to be making strong progress, but they cannot fake dividends. Dividends are cash outlays that an unsuccessful company could never produce. A history of dividend payments is one thing that all the best dividend stocks have in common.

To find the top U.S. dividend stocks don’t overlook hidden assets

When researching the best dividend stocks also take a close look at the company’s balance sheet. Can you spot any hidden assets? For instance, when a company buys real estate, the purchase price goes on its balance sheet as the historical value of the asset. Over a period of years or decades, the market value of that real estate may climb substantially. But the historical purchase price remains unchanged on the balance sheet. You have to look closely to spot this hidden value. At times, the hidden assets in a company’s real estate can even come to exceed the market value of its stock.

Unusually high dividend yields are attractive—but could be a danger sign

When looking for stocks with high dividend yields, you should avoid the temptation of seeking out stocks with the highest yields—simply because they have above-average yields.

That’s because a high yield may signal danger rather than a bargain if it reflects widespread investor skepticism that a company can keep paying its current dividend.

Dividend cuts will always undermine investor confidence, and can quickly push down a company’s stock price.

Above all, for a true measure of stability, focus on stocks with high payouts that have been maintained or raised during economic or stock-market downturns. Generally, these firms leave themselves enough room to handle periods of earnings volatility. By continually rewarding investors, and retaining enough cash to finance their businesses, they also provide an attractive mix of safety, income and growth for those following our Successful Investor approach.

All in all, a track record of dividend payments is a strong sign of reliability and an indication that investing in the stock will most likely be profitable for you in the future.

By all means eliminate losing stocks from your portfolio—but don’t try and time the market

If you look back at the history of the most successful stocks on the market, you’ll find many have dropped 30%, 60%, even 90%, at one time or another, in past market declines. They then went on to recover.

Many investors try various ways of eliminating losing stocks from their portfolios. These efforts often backfire. Some lead you to sell stocks that had already fallen a great deal, and are ripe for a rebound. Others lead you to switch into better-performing groups, just when these groups may be on the verge of joining in the plunge. Worst of all, some may lead you to give up on the market altogether and “go into cash,” just when the entire market is close to a bottom.

The best way to minimize losers is to follow our three rules, and apply them diligently.

Use our three-part Successful Investor approach to find the best dividend-paying stocks

1. Hold mostly high-quality, dividend-paying stocks.
2. Spread your money out across most if not all of the five main economic sectors: Manufacturing & Industry, Resources & Commodities, Consumer, Finance and Utilities.
3. Downplay or stay out of stocks in the broker/media limelight.

If you look for safer dividend stocks, do you feel you are significantly narrowing your options to choose from?

How much of your portfolio is made up of dividend stocks?