Topic: Dividend Stocks

The dividend yield formula can lead you to uncover high-quality blue-chip stocks

July 4, 2019|by Scott Clayton

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Use the dividend yield formula to better understand how a stock can fit into your portfolio—especially if you invest as we recommend in companies with sustained histories of dividend payments

The dividend yield formula is a ratio used for dividend stocks. It is calculated as the total annual dividends paid per share, divided by the current stock price.

When you’re looking for income-producing stocks, dividend yield is typically your most important consideration (more on that below). The best companies to invest in for a high dividend yield have strong positions in healthy industries. They also incorporate strong management that makes the right moves to remain competitive in changing marketplaces.

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.

Use a dividend yield formula to help determine the investment quality of a company

Dividend yields are a sign of investment quality. Some good companies reinvest profits to spur growth instead of paying dividends. But fraudulent and failing companies are hardly ever dividend-paying stocks. So if you only buy stocks that pay dividends, you’ll automatically stay out of almost all the market’s worst stocks.

For a true measure of stability, focus on those companies that have maintained or raised their dividend yields 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-and are a big part of a successful long term investment strategy.

Note that when looking for high dividend stocks, you should avoid the temptation of “reaching for yield.” That is, choosing investments purely because they offer a high current yield. 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 always undermine investor confidence, and can quickly push down a company’s stock price.

Use the dividend yield formula to help discover the best high-paying blue chip stocks

A company with a long-term record of paying dividends is generally one that is most deserving of the “blue chip” label in its traditional sense. 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.

That’s not to say there won’t be surprises that affect every company in a particular industry. But regardless of whether investors opt for stocks with high dividend yield, picking well-established, dividend-paying stocks benefits most investors. They have the asset size and financial clout (including solid balance sheets and strong cash flow) to weather market downturns or changing industry conditions.

Dividend stocks that meet our Successful Investor criteria offer both capital-gains growth potential and regular income. In fact, dividends are still likely to be paid regardless of changes in the price of the underlying stock.

What’s more, dividends from Canadian companies come with a tax credit. This cuts your effective tax rate.

All in all, it’s realistic to assume dividends from blue chip companies will continue to contribute around a third of your total portfolio returns.

Invest in the highest-yielding Canadian dividend stocks (if they have a history of success) for long-term profits

Follow our Successful Investor philosophy over long periods and we think you’ll likely 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.

Use our three-part Successful Investor approach, along with the dividend yield formula, to find the best stocks to invest in

We think investors will profit most-and with the least risk, by mostly buying shares of well-established, dividend-paying stocks with strong business prospects. Follow TSI Network’s three-part Successful Investor strategy: 1. Invest mainly in well-established 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.

Do you think there is too much emphasis on dividend-paying stocks? Are there other stocks that perform just as well?