Topic: Dividend Stocks

How successful investors spot top dividend-paying investments

September 21, 2020|by Pat McKeough

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Do you know how to find the best dividend-paying investments for your portfolio? We have some tips for you.

Even though the best dividend-paying investments will likely be your most profitable holdings, dividends rarely get the respect they deserve—especially from beginning investors. Still, good dividend stocks are a valuable component of any sound investing portfolio.

Do you know the qualities and characteristics of dividend-paying stocks, or the ways to find them? Read on to learn this valuable information.

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You can get regular income with the best dividend-paying investments

Canadian dividend stocks offer both capital-gains 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 (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%.

A couple of decades ago, you could assume that dividends would supply up to about one-third of the stock market’s total return. Some dividend yields are lower than they used to be, of course, as stock prices have moved higher lately. But it’s still safe to assume that dividends will continue to supply perhaps a quarter of the market’s total return.

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 profit with the least risk.

The best Canadian dividend-paying investments dominate an industry

We look for Canadian 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.

Canadian 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. As you get older and closer to retirement, you should raise the proportion of dividend-paying stocks in your portfolio, to cut risk and improve the stability of your investment results.

The best dividend-paying investments feature hidden assets.

When researching dividend stocks, take a close look at their balance sheets. Can you spot any hidden assets? For instance, when a company buys real estate, the purchase price goes on its balance sheet at 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 historic purchase price remains unchanged on the balance sheet. At times, the hidden assets in a company’s real estate can even come to exceed the market value of its stock.

A dividend yield can be misleading, so look beyond it when seeking dividend-paying investments

As with conservative dividend-paying investments, high growth dividend stocks offer investors a measure of security. Dividends, after all, are much more stable than earnings projections. More important, dividends are impossible to fake—either the company has the cash to pay them or it doesn’t.

However, it’s important to avoid judging a company based solely on 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 stock’s yield could be high simply because its share price has dropped sharply in anticipation of a dividend cut.

As well, you should always remember that while aggressive stocks may hold the potential for greater gains than conservative selections, they expose you to a higher level of risk—whether or not they are currently paying dividends.

That’s why we recommend that you look beyond dividend yield when making investments in high growth dividend stocks, and look for dividend stocks that have also established a business and have at least some history of building revenue and cash flow.

Do you believe in the efficacy of dividend-paying investments or do you think there is too much risk with them, particularly in relation to investments like high-quality short term bonds?