Topic: Dividend Stocks

What Are the Highest-Yielding Canadian Dividend Stocks?

September 28, 2022|by Scott Clayton

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Investors interested in dividends should only buy the highest-yielding Canadian dividend stocks if they meet these criteria, but don’t have these risk factors.

Dividend yield is the percentage you get when you divide a company’s current yearly payment by its share price. When looking for the highest-yielding Canadian dividend stocks with the best chance of success, look for investment quality—but also watch out for danger signs.

Before we learn more about high-yielding Canadian dividend stocks and how to identify them, let me first share that if you want specific advice on stocks to choose, check out our TSI Dividend Advisor. A new advisory—TSI Dividend Advisor—launches a new system that can help assure your financial future with dividend stocks. Whatever success you have had with dividend stocks, you can now expect to have much more. We have developed powerful new proprietary ratings that will help you unlock the full power of dividend stocks.

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.

The best of the highest-yielding Canadian dividend stocks have a history of success

Like most of our investing advice, let me start by suggesting you follow our Successful Investor philosophy over long periods to achieve better-than-average investing results.

Our first rule tells you to buy high-quality, mostly dividend-paying stocks. These stocks have generally been succeeding in business for a decade or more, perhaps much longer. But in any case, they have shown that they have a durable business concept. They can wilt in economic and stock-market downturns, like any stock. But most thrive anew when the good times return, as they inevitably do.

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.

Benefits

Why invest in Canadian dividend stocks? For one, the dividend tax credit

Canadian taxpayers who hold Canadian dividend stocks get a special bonus. Their dividends can be 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.

A couple of decades ago, you could assume that dividends would supply up to about one-third of the stock market’s total return. Dividend yields are generally lower today than they were a few years ago, but it’s still safe to assume that dividends will continue to supply perhaps a third of the market’s total return over the next few decades.

So apart from the Canadian dividend tax credit giving you a major tax-deferral opportunity, dividends can supply a big part of your overall long-term portfolio gains.

Danger signs

The highest-yielding Canadian dividend stocks can be riskier than they appear

Investors should avoid judging a company based solely on its dividend yield. 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 due to the fact its share price has dropped sharply (because you use a company’s share price to calculate yield) in anticipation of a dividend cut. That’s why we recommend that you look beyond dividend yield when making investment decisions, and look foremost for companies that have also established a sound business and a history of building revenue and cash flow.

More on danger signs when looking for the highest-yielding Canadian dividend stocks to buy

When looking for the highest-yielding Canadian dividend stocks, 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 can keep paying its current dividend.

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

Above all, for a true measure of stability, focus on stocks that have a high dividend payout 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.

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

Should you invest in these high-yield Canadian dividend stocks?

If you’re looking just at yield, a high-yield Canadian dividend stock is over 5 or 6%, like BCE Inc. (BCE), IGM Financial (IGM), and Enbridge (ENB). But based on the information above, should you invest in them? If you want direct advice, subscribe to TSI Dividend Advisor and find out.

Have you had a dividend stock that didn’t do as well as you hoped? Did you keep it or sell it?