Many investors look for high dividend yield stocks to boost their investment returns— but they need to take a very close look at the sustainability of a company’s dividend.

Once investors learn about dividends; the next step is to look for high dividend yield stocks. It’s only natural to seek out a high dividend yield, after all, one of the most concrete things about an investment is its dividend yield—the percentage you get when you divide its current yearly dividend payment by its price. It’s an indicator we pay especially close attention to when we select stocks to recommend.

High dividend yield stocks are a key part of a successful portfolio—but at the same time, they can give investors a false sense of security. That’s because some investors tend to think that all high dividend yield stocks are safe. However, dividend payments are not nearly as predictable or as safe as bank interest. In fact, investment income like dividends can dry up in a heartbeat. Companies are sometimes unable to honour their commitments, and they sometimes spring the bad news on you with no warning.

At TSI Network, we feel that high dividend yield stocks are sometimes giving you a warning sign—and that requires you to take a very close look at the sustainability of a company’s dividend. A high dividend yield stock could mean investors are selling and pushing the price down in anticipation of a dividend cut. A falling price makes yield go up (because you use the latest dividend to calculate yield). When an investment does cut or halt its dividend, its yield collapses—and often its share price.

Still, if you stick with quality high dividend yield stocks, the income you earn can supply a significant percentage of your total return. In fact, dividends can contribute up to a third of an investor’s long-term investment returns, without even considering the effects of the Canadian dividend tax credit.

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.

Of course, dividends may suffer if the recovery stalls. But either way, you can improve your investment safety by focusing on stocks with long histories of dividends, like the high dividend stocks we recommend in Canadian Wealth Advisor.

4 ways to invest in profitable high dividend yield stocks

1. Look for companies with long-term success and a long history of paying dividends. These companies are the most likely to keep paying and increasing their dividends.
2. The current financial health of a 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. How does the company manage its relationships with investors? If there is a favourable relationship, and the company fits the other qualifications listed above, it may be a good dividend-paying stock to invest in.
4. Note the competition. Look for companies with a strong hold on a growing market and a unique product or service that cuts its competition.

Have you invested in a high dividend yield stocks? Were they profitable for you? Share your thoughts and experiences with us in the comments section.