Topic: Dividend Stocks

Finding the top Canadian dividend stock picks for more profitable investing is a lot easier if you follow these tips

January 5, 2023|by Scott Clayton

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The best Canadian dividend stock picks include those with a long history of dividends, often a recent dividend increase, and a commitment by management to keep offering an attractive dividend

One key feature of the best Canadian dividend stock picks is that they are maintaining or raising their dividend payments. That’s because more investors are paying attention to dividend yields (a company’s total annual dividends paid per share divided by the current stock price) as stock markets continue to recover.

That’s good news for investors, because dividends are more dependable than capital gains as a source of income. In fact, you can assume that dividends will likely contribute up to a third of your long-term investment returns, without even considering the tax-lowering impact of the dividend tax credit.

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Canadian dividend stocks come with extra benefits for Canadian investors

Canadian taxpayers who hold Canadian dividend stocks get a special bonus. Their dividends are eligible for the dividend tax credit in Canada. This dividend tax credit—which is available on dividends paid on Canadian stocks held outside of an RRSP, RRIF or TFSA—will cut your effective tax rate.

This means that dividend income will be taxed at a lower rate than the same amount of interest income.

Canadian dividend stocks are an important contributor to your long-term gains, and dividend-paying stocks tend to expose you to less risk than non-dividend-payers. That’s why the majority of your stocks should be dividend-payers at all times. As you get older and closer to retirement, you should raise the proportion of dividend-paying stocks in your portfolio, to cut risk and improve the stability of your investment results.

You should also keep these important points in mind:

• Canadian dividends can grow.
• Look for Canadian dividend stocks with consistent dividend records
• The top Canadian dividend stocks can have hidden assets.
• The best Canadian dividend stocks dominate an industry.

Discover 5 Canadian dividend stock picks that are worth investing in

We still think investors will profit most—and with the least risk—by buying shares of well-established, dividend-paying stocks with strong business prospects.

These are companies that have leading positions in healthy industries. They also have strong management that will make the right moves to remain competitive in a changing market.

Stocks like these give investors an additional measure of safety despite today’s volatility. And the best ones offer the attractive combination of a moderate p/e (the ratio of a stock’s price to its per-share earnings), steady or rising dividend yields (annual dividend divided by the share price) and promising growth prospects.

Here are some of the stocks we think meet those criteria:

• Bank of Nova Scotia, Toronto symbol BNS
• Canadian Pacific Railway Ltd., Toronto symbol CP
• Imperial Oil Ltd., Toronto symbol IMO
• Loblaw Companies Ltd., Toronto symbol L
• Telus Corp., Toronto symbol T

Use these factors to find the best Canadian dividend stock picks

• 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.

All in all, good dividend stocks are a valuable component of any sound investment portfolio.

Use our three-part Successful Investor approach when making your Canadian dividend stock picks

We think Canadian dividend stock picks are some of the best stocks you can own. And to build a strong portfolio with the best chance of gains, we recommend using our three-part Successful Investor philosophy for long-term investing:

1. Invest mainly in well-established, dividend-paying companies;
2. Spread your money out across most if not all of the five main economic sectors (Manufacturing & Industry; Resources & Commodities; the Consumer sector; Finance; Utilities);
3. Downplay or avoid stocks in the broker/media limelight.

 Do you avoid U.S. dividend stocks if there are controversies surrounding them?

Do you find that dividend stocks contribute significantly to your portfolio’s value or do you think they are overrated?