Topic: Dividend Stocks

Here’s how to do dividend investing the right way for maximum portfolio gains

October 9, 2024|by Scott Clayton

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Use these key tips to learn how to do dividend investing successfully to pick the best investments with the least amount of risk

Top-quality stocks tend to lose less of their value in market setbacks. They also tend to bounce back nicely when conditions improve. These are the kinds of stocks we continue to recommend in our newsletters and other services.

To build a portfolio of those stocks–and to show the best long-term results, Pat McKeough still thinks you should stick with his three-part program:

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

Meantime, if you are interested in how to do dividend investing for maximum success, then you need to recognize that Canadian dividend stocks are an important contributor to your long-term gains—and that 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.

Knowing how dividend yield is calculated is the first step in learning how to do dividend investing the right way

Dividend yield is calculated as the total annual dividends paid per share, divided by the current stock price. Movements in the stock price will change the dividend yield.

Learning how to calculate dividend yield gives you a vital piece of investing information. The dividend yield is arguably one of the most important ratios to calculate for dividend-paying stocks. When you’re looking for income-producing stocks, dividend yield is typically your top consideration.

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.

Look for these two key financial factors when learning how to do dividend investing for the highest overall returns

Dividend history is a very important way to judge the worth of dividend stocks. Ideally, you should look for dividend stocks that have been paying dividends for 5 or more years. As a general rule, companies that make money regularly are safer than chronic or even occasional money losers. Companies can fake earnings, but dividends are cash outlays. In fact, if you only buy dividend-paying stocks, you’ll avoid most frauds.

What is the dividend growth stock’s debt load like? Would it have a hard time recovering from an economic downturn? The more manageable the debt, the better. When bad times hit, debt-heavy companies often go broke first. Especially ones that also keep trying to allocate part of their cash flow to paying dividends.

Find out how you can realize significant tax benefits from Canadian dividend stocks

You pay tax on dividends in the year you get them, if you hold the shares in a cash account and outside of your RRSP, RRIF or TFSA. However, dividends on Canadian companies held outside of one of those registered accounts receive favourable tax treatment in Canada, thanks to the dividend tax credit.

This dividend tax credit 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.

Some economic sectors are more volatile than others when you consider how to do dividend investing successfully

Speaking very generally, stocks in the Resources sector and the Manufacturing sector are apt to expose you to above-average volatility, while those in the Canadian Finance and Utilities sectors involve below-average volatility. Shares of many finance-sector firms have been unusually volatile in the past few years, because their industry is changing and expanding. Again, however, profits of companies in Canadian Finance and Utilities tend to be more stable than profits in Resources or Manufacturing companies.

Consumer sector stocks are apt to fall in the middle, between the more volatile Resources and Manufacturing companies and more stable Finance and Utilities companies.

Invest in dividend stocks with a history of success for better results

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.

We look for dividend stocks that have industry prominence, if not dominance. Our reasoning, besides brand recognition, is that major companies can influence legislation, industry trends, etc. to suit themselves. Minor firms can’t do that.

As an aside, over long periods, you’ll probably find that a third of your stocks do about as well as you hoped, a third do better, and a third do worse. This is partly due to that random element in stock pricing that we’ve often mentioned. It also grows out of the proverbial “wisdom of the crowd.” The market makes pricing mistakes and continually reverses itself. But the collective opinion of all individuals buying and selling in the market eventually beats any single expert opinion.

Is dividend investing part of your long-term strategy or do you find dividends to be overrated?

What is your experience with dividend stocks that have lowered or cancelled dividend payments?