Topic: Dividend Stocks

Learn how to get dividends from stocks that are sustainable to help you build wealth over time

July 3, 2024|by Scott Clayton

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Use these tips and strategies to learn how to get dividends from stocks that will lead you to maximum portfolio gains

If you are interested in learning how to get dividends from stocks that will be sustainable, focus on those companies that have maintained or raised 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.

Additionally, the best dividend-paying stocks offer capital-gains growth potential as well as regular income from dividend payments.

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.

How to get dividends from stocks? Start by zeroing in on income stocks.

Income stocks are stocks that produce above-average income, usually in the form of dividends.

An income stock usually has two distinct traits. You can identify income stocks by their high dividend yields (the percentage you get when you divide a company’s current yearly payment by its share price). For example, stocks with a dividend yield higher than, say, 3% would typically be attractive to an income-seeking investor. Investors should note that a very high dividend yield can also be a warning sign of trouble (such as an imminent dividend cut).

Apart from a high dividend yield, you should look for a second trait: stocks that have a long history of paying (and raising) their dividends. In determining how to get dividends from stocks, this is one of the most important factors.

If you’re an income stock 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 most if not all of the five sectors.

Here’s what to do to find the best stocks paying the highest dividends—and how to determine if they will keep paying them:

• Look for companies with a history of long-term success.
• Examine the current financial health of the company.
• If a company currently offers a steady dividend, this is a good sign of its potential to continue doing so.
• Look for companies with a strong hold on a growing market and a unique product or service that cuts its competition.
• Download our free report 7 Winning Strategies for Dividend Investors to build strength into your portfolio by investing in the best high-quality dividend stocks.
• Subscribe to TSI Network’s Dividend Advisor. When a dividend-paying stock grabs our attention, we write about it here.

How to get dividends from stocks: Take advantage of the dividend tax credit as part of your dividend stock investing strategy

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.

If you include top-quality dividend stocks in your portfolio, 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.

Use our three-part Successful Investor approach to help you find the best dividend-paying stocks 

1. Invest mainly in well-established, dividend-paying companies;
2. Spread your money out across most if not all of the five main economic sectors (Manufacturing & Industry; Resources & Commodities; the Consumer sector; Finance; Utilities);
3. Downplay or avoid stocks in the broker/media limelight. 

Bonus tip: Look for hidden assets to help you find the best stocks to buy

A balance sheet is a financial statement that gives a snapshot of a company’s assets, liabilities and shareholders’ equity. Investors use this data to determine how sound a company’s finances are—and also to discover if it has any “hidden assets.”

Certain types of assets on a balance sheet might have actual market values well above historical values. For example, when a company buys real estate, the purchase price goes on its balance sheet as the historical value of the asset. Over a period of years or decades, the market value of that real estate may climb substantially. But the purchase price remains unchanged on the balance sheet.

At times, in fact, the hidden value in a company’s real estate can come to exceed even the market value of its stock. This hidden value may only become apparent to investors when the company upgrades the use of the real estate. For example, a merchandiser might repurpose a parking lot to build a shopping mall with a residential condo tower on higher floors, and a parking garage down below. Similarly, balance sheets often fail to assign any value to brand names, even those household names that have built up multitudes of loyal customers over the years.

How much do you focus on dividend stocks in your portfolio, and how much do they contribute to your overall return?