Topic: Dividend Stocks

QUIZ: Here’s a quiz that lets you learn the ins and outs of how to find dividend stocks for maximum portfolio gains

August 27, 2019|by Scott Clayton

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Investing strategies for how to find dividend stocks to buy involve staying focused on a stock’s investment quality and history of dividends, but also your own portfolio diversification

We feel that top dividend stocks are a valuable component of any sound investment portfolio.

Are you interested in learning how to find dividend stocks that will provide the best portfolio returns? Test your knowledge below, and perhaps learn something new in the process.

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.

 A. Dividends are:

1. A sign of investment quality
2. More reliable than capital gains
3. Great at driving long-term gains
4. All of the above

You are correct if you answered 4.

Dividends are a sign of investment quality. A yearly 2% or 3% or 5% dividend barely seems worth mentioning alongside possible yearly capital gains of 10%, 20% or 30% or more. But dividends are far more reliable that capital gains.

Dividend stocks are an important contributor to your long-term gains, and dividend-paying stocks tend to expose you to less risk than non-dividend-payers. That’s why the majority of your stocks should be dividend-payers at all times.

B. Which of the following characteristics should you look for when trying to determine the suitability of a dividend stock?

1. Industry prominence
2. A history of paying dividends
3. Dividend payments sustained during economic or stock market downturns
4. All of the above.

You are correct if you answered 4.

If you only buy stocks that pay dividends, you’ll automatically stay out of almost all the market’s worst stocks.

One of the best ways of picking a quality dividend stock is to look for companies that have been paying dividends for at least 5 to 10 years. Companies can trump up quarterly earnings and issue press releases to appear to be making strong progress, but they cannot fake dividends. Dividends are cash outlays that an unsuccessful company could never produce. A history of dividend payments is one thing that all the best dividend stocks have in common.

We look for dividend stocks that have industry prominence, if not dominance. Our reasoning, besides brand recognition, is that major companies can influence legislation, industry trends, etc. to suit themselves. Minor firms can’t do that.

Above all, for a true measure of stability, focus on stocks that pay a steady dividend that has remained steady or risen 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. These are the kind of stocks we look for at the Successful Investor.

C. Which sectors have some of the best dividend stocks?

1. Utilities and Finance
2. Manufacturing and Consumer
3. Resources and Industry
4. Utilities and Consumer

You are correct if you answered 1.

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). However, the proportion of 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.

D. How much of your total return over long periods can come from your top dividend stocks?

1. Up to 5%
2. Up to 33%
3. Up to 10%
4. Up to 15%

You are correct if you answered 2.

Dividend stocks rarely get the respect they deserve, especially from beginning investors. The income from your top dividend stocks can produce as much as a third of your total return over long periods.

E. Canadian investors interested in dividend stocks…

1. Should avoid them all together
2. Know that they cannot receive dividends in Canada
3. Know about a special tax credit
4. None of the above

You are correct if you answered 3.

Canadian 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 (investors in the highest tax bracket pay tax of around 29% on dividends, compared to 50% on interest income). Investors in the higher tax bracket pay tax on capital gains at a rate of 25%.

When you add in the security of stocks that have dividend records going back many years or decades, and include the potential for tax-advantaged capital gains as well as dividend income, Canadian dividend stocks are an attractive way to increase your portfolio gains.

Ultimately, dividend stocks are good for cutting tax rates and making investors more money.

Use our three-part Successful Investor approach to dictate your strategy on how to find dividend stocks

1. Hold mostly high-quality, dividend-paying stocks.
2. Spread your money out across most if not all of the five main economic sectors: Manufacturing & Industry, Resources & Commodities, Consumer, Finance and Utilities.
3. Downplay or stay out of stocks in the broker/media limelight.

Have you ever invested in a stock with a high dividend yield that wound up being too high to be sustainable? What happened in this situation?

What is your opinion on dividend stocks maintaining their ability to contribute substantially to your long term gains?