Investors want to find the top dividend-paying stocks with a record of consistency in distributing dividend payments. Dividend yields, however, can be misleading and stocks that have the highest dividend yields may also entail significant risk. That can, in turn, lead to negative consequences and losses.

Conservative stocks such as utilities usually offer sustainable dividends in addition to prospects of steady growth. If you stick with quality dividend stocks, like those you find using the Successful Investor approach, the income you earn can supply a significant percentage of your total return.

Many investors looking for the top dividend-paying stocks want to derive immediate income from the stocks they hold, and for many, dividend yield is the most important consideration. But in some cases, dividend yield can be misleading.

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What is a dividend yield?

The dividend yield is the percentage you get when you divide the current yearly dividend payment by the share, or unit, price of the investment. It’s an indicator that we, at The Successful Investor, pay close attention to when selecting stocks to recommend in our investment newsletters.

A high dividend yield can be a sign of danger

On the other hand, an attractive yield, and especially a very high dividend yield, can give you a false sense of security. That’s because many investors have a tendency to think that all investment income is almost as safe and predictable as bank interest.

The fact is that investment income can dry up suddenly. Money-losing companies are sometimes unable to keep paying a longstanding dividend, and they sometimes spring the bad news on their shareholders with little or no warning.

To reiterate: a high dividend yield may be a danger sign. It may mean insiders are selling and pushing the price down. A falling share price makes a stock’s yield go up (because you still use the latest dividend payment as the numerator to calculate yield—but the denominator, the price, has dropped). But when a stock does cut or halt its dividend, its yield collapses.

What investors need to know about top dividend-paying stocks

The top dividend-paying stocks to invest in have strong positions in healthy industries. They also rely on strong management to make the right moves to keep them competitive in changing marketplaces.

The top dividend-paying stocks have the following characteristics:

• They provide regular income
• They are one of the dominate firms in an industry
• They feature hidden assets
• They are on high-quality, proven companies
• They operate a well-established business
• They have strong management and balance sheets
• They have manageable debt

Above all, for a true measure of stability, focus on stocks that pay a dividend they’ve maintained or raised 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 sound indication that investing in the stock will be profitable for you in the future. 

Canadian investors benefit even more from the top dividend-paying stocks

Canadian stocks with dividends have three big advantages:

• You can count on dividends to provide as much as one third of your total return.
• Dividends can grow even when stock prices do not. Top dividend stocks do their best to maintain their dividend payouts and increase them whenever possible.
• Dividends are a sign of investment quality. If you only buy stocks that pay dividends, you’ll automatically stay out of almost all the market’s worst stocks.

Furthermore, 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 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%.

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

If you stick with top quality, high dividend paying stocks, like we recommend in the Successful Investor approach, the income you earn can supply a significant percentage of your total return—as mentioned, as much as a third of your gains. 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 that when it comes to investment safety, a long history of steady dividends is more important than a current high dividend yield.

Do you like top dividend stocks more for their dividend payments or their stability?