Top dividend stocks are a key part of a successful portfolio—but watch out that you don’t “reach for yield”
Top dividend stocks can produce as much as a third of your total return over long periods. These payouts are drawn from earnings cash flow and paid to the shareholders of the company. Typically, these dividends are paid quarterly, although they may be paid annually or monthly as well.
At TSI Network, we think investing in dividend stocks is one of the best investment decisions you can make. Dividends serve as a way for companies share to the wealth they accumulate through successfully operating their businesses.
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.
Top dividend stocks provide steady dividends—a sign of investment quality
Some good companies reinvest profits instead of paying dividends. But fraudulent and failing companies hardly ever pay dividends. 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 companies that have maintained or raised their dividends during economic and stock market downturns. These firms leave themselves enough room to handle periods of earnings volatility. By continually rewarding investors, and retaining enough cash to finance their businesses, top dividend stocks provide an attractive mix of safety, income and growth.
Top dividend stocks are a sign of investment quality
Some good companies reinvest profit instead of paying dividends. But fraudulent and failing companies hardly ever pay dividends. So if you only buy stocks that pay dividends, you’ll automatically stay out of almost all the market’s worst stocks.
Major benefits can come with Canadian dividend stocks
Canadian taxpayers who hold Canadian dividend stocks get a special bonus. Their dividends are 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 (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%.)
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.
You should also keep these important points in mind:
Canadian dividends can grow.
Look for Canadian dividend stocks with consistency.
Canadian dividend stocks can have hidden assets.
The best Canadian dividend stocks dominate an industry.
Some of the top dividend stocks are in the Utilities and Canadian Finance sector
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). The proportion of your holdings you devote to each sector depends on your temperament and financial goals.
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.
The biggest risk you’ll find with top dividend stocks
When looking for stocks with high dividend yields, you should avoid the temptation of seeking out stocks with the highest yield—simply because they have above-average yields.
That’s because 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 will always undermine investor confidence, and can quickly push down a company’s stock price.
Above all, for a true measure of stability, focus on stocks that have a high dividend yield that they have maintained or raised with their dividends during economic or stock-market downturns. As mentioned earlier, 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 strong indication that you may be investing in the best long-term dividend stocks.
Are you benefiting from top dividend stocks? Share your experience with us in the comments.
Learn everything you need to know in
'7 Winning Strategies for Dividend Investors'
FREE Special Report from The Successful Investor.
The Best Canadian Dividend Stocks to Buy:
REITS Canada and other Top Canadian Dividend Stocks.
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7 Winning Strategies for Dividend Investors
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