Topic: Dividend Stocks

Criteria for the Best Time To Buy Dividend-Paying Stocks

May 7, 2024|by Scott Clayton

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The best time to buy dividend-paying stocks is when you find companies offering sustainable dividends and ready to survive periods of adversity before going on to thrive when conditions improve

We think investors should put the bulk of their investment portfolios in high-quality, mostly dividend-paying stocks that meet our Successful Investor criteria. As well, portfolios should be diversified across most if not all of the five main economic sectors. The best time to buy dividend-paying stocks is really anytime you find investments that are in a position to survive a period of adversity and go on to thrive all over again when conditions improve.

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Two guidelines we recommend for picking the best Successful Investor dividend stocks

It’s important to remember that not all dividend-paying stocks are created equal. Here are two main ways we decide which dividend-paying stocks to buy.

1. Maintaining or increasing dividends: Apart from a high dividend yield, look for stocks that also have a long history of paying (and raising) their dividends. For a true measure of stability, focus on those companies that have maintained or raised their dividends during economic and stock-market downturns. Companies with the best dividend reinvestment plans tend to have this quality.

That’s because 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.

2. A reasonable dividend yield: You can identify income stocks by their high dividend yields (the percentage you get when you divide a company’s current yearly payment by its share price). For example, stocks with a dividend yield higher than, say, 3% would typically be attractive to an income-seeking investor. The best dividend reinvestment plans usually have reasonable yields.

However, it’s important to avoid judging a company based solely on its dividend yield. That’s because a high yield can sometimes be a danger sign rather than a bargain. For example, a company’s dividend yield could be high simply because its share price has dropped sharply (remember, you use a company’s share price to calculate yield). In that case, a high yield can be a sign of an imminent dividend cut.

The best time to buy dividend-paying stocks is when you find investments that have these five qualities:

1. A history of long-term success. These companies are the most likely to keep paying and increasing their dividends.
2. A current healthy financial situation for the company. If a company is doing well, has done so consistently, and shows signs of growth, these factors are indicative of stocks that will keep paying a dividend.
3. A current dividend. If a company currently offers a healthy dividend, this is a good sign of its potential to continue offering a steady dividend.
4. A strong hold within the company’s industry. Look for companies with a strong hold on a growing market and a unique product or service that cuts its competition.
5. Growth and income. The best dividend-paying stocks offer both capital-gains growth potential and regular income from dividend payments.

Watch out for this big risk when considering the best time to buy dividend-paying stocks

As mentioned above, when looking for stocks with high dividend yields, avoid the temptation of seeking out stocks with the highest yield—simply because they have above-average yields.

That’s because a very high yield may signal danger rather than a bargain if it reflects widespread investor skepticism (through its low share price) 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. Even the best dividend reinvestment plans can suffer if a company cuts its dividend.

Bonus Tip: 4 key stock dividend dates

1. Declaration Date: Several weeks in advance of a dividend payment, a company’s board of directors sets the amount and timing of the proposed payment. The date of that announcement is known as the declaration date.
2. Payable Date: Is the date set by the board on which the dividend will actually be paid out to shareholders.
3. Record Date: Only shareholders who hold the stock before the payable date will receive the dividend payment. That date is known as the record date. It’s set any number of weeks before the payable date.
4. Ex-dividend Date: Two business days before the record date, the shares begin to trade without their dividend. This date is the ex-dividend date. If you buy stocks one day or more before their ex-dividend date, you will still get the dividend. That’s when a stock is said to trade “cum-dividend,” or “with dividend.” If you buy on the ex-dividend date or later, you won’t get the dividend. The ex-dividend date is in place to allow pending stock trades to settle.

In summary, when looking to invest in dividend-paying stocks, it’s important to consider several key factors. First, look for companies with a history of maintaining or increasing their dividends over time, especially during economic downturns. A reasonable dividend yield is also important, but be wary of yields that seem too high as they may signal an impending dividend cut. The best dividend reinvestment plans are often found with companies that have a strong hold in their industry, offer both growth and income potential, and have a healthy financial situation. It’s also crucial to understand key dividend dates like the declaration, payable, record, and ex-dividend dates. By keeping these guidelines in mind, investors can make informed decisions about when and where to invest in dividend-paying stocks to maximize their returns and minimize their risks. With the best dividend reinvestment plans available, investors will be compounding income for years to come, allowing their investment to grow significantly over time..

Do you prefer dividend-paying stocks because of their stability or is the dividend payment the most important part of the investment for you?

This article was originally published in 2018 and is regularly updated.