Topic: Dividend Stocks

How Can You Find the Highest Dividend-Paying Stocks?

October 16, 2023|by Scott Clayton

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Some of the highest dividend-paying stocks on the market can be unexpectedly risky

Before we begin, the best Canadian dividend stocks respond to tough economic times by doing their best to maintain, or even increase, their payouts. That may or may not make them the highest dividend-paying stocks.

We place a high value on a sustained history of dividend payments. However, an attractive yield, especially a high dividend yield, can give you a false sense of security. That’s because many investors have a tendency to think that the highest dividend-paying stocks are the best ones to add to their portfolios.

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We prefer to find the highest dividend-paying stocks that are also high quality. You can do that too by:

• Watching out for unusually high dividend yields, which may signal more of a danger than a bargain
• Looking for businesses that have an established business and a history of sales gains, plus some earnings, along with dividends
• Avoid stocks in the broker/media limelight

Should you watch out for unusually high dividend yields?

Investors should avoid judging a company based solely on whether it’s among the highest dividend-paying stocks or by evaluating its dividend yield (the percentage you get when you divide a company’s current yearly payment by its share price). That’s because a high yield can sometimes be a danger sign rather than a bargain. For example, 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.

A high dividend yield may also be a danger sign if it means insiders are selling and pushing the price down. A falling share price makes a stock’s yield go up (because you still use the latest dividend payment as the numerator to calculate yield while the denominator, the price, has dropped). But when a stock does cut or halt its dividend, its yield collapses.

That’s why we recommend that you look beyond dividend yield–beyond the highest dividend-paying stocks–when making investment decisions. Instead Successful Investors look for companies that also have established a sound business with a history of building revenue and cash flow—as well as a sustainable dividend.

What are the biggest risks with the highest dividend-paying stocks?

When looking for stocks with high dividend yields, you should avoid the temptation of seeking out stocks with the highest yields—simply because they have above-average yields.

That’s because—as we mentioned earlier—a high yield may signal danger rather than a bargain if it reflects widespread investor skepticism that a company is able to keep paying its current dividend.

Dividend cuts will always undermine investor confidence, and can quickly push down a company’s stock price.

How do you pick the best of the highest dividend-paying stocks?

The best stocks to hold in your portfolio all have one thing in common: They give you reason to believe they might be worth holding on to indefinitely.

Most of these stocks have an established business and a history of sales gains, plus some earnings, if not dividends. To put it more simply: these stocks have a clear business plan that seems to be working.

Above all, for a true measure of stability, focus on stocks that have a dividend that has been maintained or raised during economic or stock-market downturns. Generally, 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 also provide an attractive mix of safety, income and growth.

In short, a track record of dividend payments is a strong sign of reliability and an indication that investing in the stock will be profitable for you in the future.

How do you get regular income from the highest dividend-paying stocks?

Canadian dividend stocks offer both capital-gain growth potential and regular income from dividend payments. In fact, dividends are likely to still be paid regardless of how quickly the price of the underlying stock rises.

Taxpayers who hold Canadian dividend stocks get an additional bonus. Their dividends can be eligible for the dividend tax credit in Canada. This means that dividend income will be taxed at a lower rate than the same amount of interest income.

The highest dividend-paying 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.

To summarize then, when it comes to investment safety, a long history of steady dividends is more important than a current high dividend yield.

Bonus Tip: Beware, the highest dividend-paying stocks often make it into the broker limelight

As you may know, one of the three key points to our Successful Investor philosophy is that you need to downplay or avoid stocks in the broker/media limelight. A similar warning applies to investment beliefs.

If you’re looking for investment beliefs that will keep your portfolio secure, start by limiting those stocks in the broker/media limelight–that’s not the spotlight most good stocks are in. That’s because those quality stocks have been high-quality investments for longer than any brief time a fad stock may spend in the limelight.

When investment-related ideas can also find their way into the broker/media limelight.

Here’s a short random sample of “seemingly-good-reasons-not-to-buy-stocks” that have made their way into the limelight over the years:

• The stock market is headed for the proverbial “seven bad years”;
• The economy has entered a long period of “secular stagnation,” which will hold the stock market back for years to come;
• The sudden expansion of deficits following the recession was sure to spark a huge revival of inflation;
• The social security system is running out of money and will require huge tax increases to stay afloat;
• The stock market is much more expensive than it looks, judging by the Shiller P/E ratio (this ratio uses an average of earnings for the past 10 years, rather than the customary P/E based on the latest year’s earnings, or estimates of earnings for the coming year);
• The market has been going up for so long that it “has to” come down soon…

What do you look for in a dividend-paying stock to help you balance the need for stability with the desire for a high yield?

This article was originally published in 2017 and is regularly updated.