Topic: Dividend Stocks

The ins and outs of finding the best high dividend paying stocks

September 2, 2016|by Pat McKeough

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The best high dividend paying stocks pay a consistent dividend year after year.

Even though the best dividend stocks can be your most profitable investments, dividends rarely get the respect they deserve, especially from beginning investors.

High dividend paying stocks can be a big part of long-term investment gains

If you stick with top quality high dividend paying 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.

Good dividend stocks are a valuable component of any sound investment portfolio. But note, though, that when it comes to investment safety, a long history of steady dividends is more important than a current high dividend yield.

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Some of the best dividend paying stocks are in the Utilities and Canadian Finance sector

While we continue to recommend that you spread your investments out across most if not all of the five main economic sectors (Manufacturing & Industry; Resources; Consumer; Finance; and Utilities). The proportion of your holdings you devote to each sector depends on your temperament and financial goals.

For example, if you’re an income investor, you may wish to place more emphasis on Utilities and Canadian banks. That’s because these firms generally pay high, secure dividends, and have long histories of raising their payments, even during downturns. However, you’ll still want to make sure your portfolio is well-diversified across all of the sectors. 

By diversifying across most if not all of the five sectors, you avoid overloading yourself with stocks that are about to slump simply because of industry conditions or investor fashion.

You also increase your chances of stumbling upon a market superstar—a stock that does two to three or more times better than the market average.

The dividend tax credit offered to Canadians can greatly increase your investment returns.

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. Investors in the highest tax bracket pay tax of around 29% on dividends, compared to 50% on interest income. At the same time, investors in the highest tax bracket pay tax on capital gains at a rate of about 25%.

Dividend reinvestment plans

Some high growth dividend stocks give their shareholders the opportunity to participate in dividend reinvestment plans (DRIPs). This lets investors use their dividends to buy new shares, sometimes at a 5% discount to the market price.

DRIPs bypass brokers, so you save on commissions. DRIPs also eliminate the nuisance effect of receiving small cash dividend payments. Generally, investors must first own and register at least one share before they can participate in a DRIP. Registration will generally cost $40 to $50 per company. The investor must then notify the company that they wish to participate in its DRIP.

You can also register for dividend reinvestment plans at no cost through most discount brokers (these are called “synthetic DRIPs”). However, the broker may or may not pass along any reinvestment discount to you. As well, you can only buy whole shares through these DRIPs, so dividends paid must be greater than the share price.

DRIPs help high growth dividend stocks attract more investors. They also let them conserve funds by issuing shares instead of paying out cash, which all growth companies like to do.

The biggest risk with high dividend paying stocks

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

That’s because 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 yield that they have maintained or raised with their dividends during economic or stock-market downturns. That’s because 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 a strong indication that investing in the stock be profitable for you in the future.

What are some the best dividend stocks you’ve ever invested in? Do you have any additional tips to share for picking high dividend paying stocks? Share your experience with us in the comments.