Topic: Dividend Stocks

Evaluating and picking the best of the highest dividend stocks for long-term gains

March 30, 2020|by Pat McKeough

Add Comment

The highest dividend stocks can harbour hidden dangers, but you’ll enhance your portfolio with the safest dividend-paying stocks

No one can predict which stocks will be average performers, which will be losers, and which ones will turn into the superstocks that wind up rising five-fold, 10-fold or more. But overall, we find dividend stocks to be less volatile, and the safest investments.

Even though the best dividend stocks in your portfolio can turn out to be your most profitable investments, dividends rarely get the respect they deserve, especially from beginning investors. We’ve always placed a high value on dividend stock investing, mainly because it provides something of a pedigree for stocks we recommend. After all, you can’t fake a record of dividends.

However, we do recommend looking beyond dividend yield when making investment decisions because an unusually high dividend yield among the highest dividend stocks can be a sign of hidden risks.

The Growing Power of Dividends Learn everything you need to know in '7 Winning Strategies for Dividend Investors' for FREE from The Successful Investor. The Best Canadian Dividend Stocks to Buy: REITS Canada and other Top Canadian Dividend Stocks.  I consent to receiving information from The Successful Investor via email. I understand I can unsubscribe from these updates at any time.

High yield can sometimes be a danger sign rather than a bargain

A dividend paying stock’s yield could be high simply because its share price has dropped sharply (because you use a company’s share price to calculate yield) in anticipation of a dividend cut. We recommend that you look for companies that have established a sound business and a history of building revenue and cash flow.

The highest dividend stocks need to have a history of paying a dividend to be reliable

One of the best ways of picking a quality dividend stock 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.

Highest dividend stocks are a sign of investment quality

Some good companies reinvest profit instead of paying dividends. But fraudulent and failing companies hardly ever pay dividends. So if you only buy stocks that pay dividends, you’ll automatically stay out of almost all 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.

More factors for finding the best highest dividend stocks

• Management’s public commitment to a dividend. A company’s commitment to the dividend is reinforced if management stands behind it publicly. Executives don’t like to be called out by the media or shareholders for failing to keep their word.
• A recent dividend increase. There are good reasons companies trumpet their dividend hikes. They are more than a reward to shareholders, they’re a statement of self-confidence by the company. We trace increases over 5 years and more, to get a timely reading on the company’s commitment to dividend increases.
• A record of earnings and cash flow. A consistently strong balance sheet can only be maintained with a regular stream of revenue and earnings to generate steady cash flow.

Highest dividend stocks can be a big part of long-term investment gains

If you stick with top quality high dividend yield stocks, the income you earn can supply a significant percentage of your total return—as much as a third of your gains. And at the same time, dividends are more dependable than capital gains as a source of investment income.

Note, though, that when it comes to investment safety, a long history of steady dividends is more important than a current high dividend yield.

Good dividend stocks are a valuable component of any sound investment portfolio.

Some of the best dividend paying stocks are Utilities and Canadian Finance shares

We continue to recommend that you spread your investments out across most if not all of the five main economic sectors (Manufacturing & Industry; Resources; Consumer; Finance; and Utilities). However, the proportion of your holdings you devote to each sector depends on your temperament and financial goals.

For example, if you’re an income investor, you may wish to place more emphasis on Utilities and Canadian banks. That’s because these stocks generally pay high, secure dividends, and have long histories of raising their payments, even during downturns. However, you’ll still want to make sure your portfolio is well-diversified across the sectors.

By diversifying across most if not all of the five sectors, you avoid overloading yourself with stocks that are about to slump simply because of industry conditions or investor fashion.

You also increase your chances of stumbling upon a market superstar—a stock that does two to three or more times better than the market average.

Have you ever been misled by a high dividend yield?