The payout history of Canadian dividend growth stocks is a major factor when considering which stocks to invest in

One of the key factors when looking for the best Canadian dividend growth stocks is their dividend history.

Ideally, you should look for dividend growth stocks that have been paying dividends for five or more years. And as a general rule, companies that make money regularly are safer than chronic or even occasional money losers. While companies can fake earnings, dividends are cash outlays. So if you only buy dividend-paying stocks, you’ll avoid most frauds.

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Looking beyond dividend yield when selecting the best Canadian dividend growth stocks

Dividend growth stocks offer investors a measure of security. Dividends, after all, are much more stable than earnings projections. More important, as mentioned above, dividends are impossible to fake—either the company has the cash to pay them or it doesn’t.

However, at the same time, it’s also important to avoid judging a company based on the fact that it pays a dividend. Nor should you be tempted solely by a high dividend yield (the percentage you get when you divide a company’s current yearly payment by its share price).

That’s because high yield can sometimes be a danger sign rather than a bargain. For example, a dividend stock’s yield could simply be the result of a sharp drop in its share price (since you use a company’s share price to calculate yield). That drop may signal investor anticipation of coming bad news.

As well, always remember that while growth stocks hold the potential for greater gains than conservative selections, they typically expose you to a higher level of risk—even if they are dividend-paying stocks.

That’s why we look beyond dividend yield when making investment recommendations, and look for dividend stocks that have an established business and a history of building revenue and cash flow.

Canadian dividend growth stocks and debt

What is the debt load like for Canadian dividend growth stocks that you’re thinking of buying? Would they have a hard time recovering from an economic downturn? The more manageable their debt, the better. When bad times hit, debt-heavy companies often go broke first. Especially ones that also keep trying to allocate part of their cash flow to paying dividends.

Instead of overemphasizing the debt-to-equity ratio, we recommend that you expand your research to look at the ratio between a company’s debt and its market capitalization or “market cap” (the value of all shares the company has outstanding).

A moderate debt-to-market-cap ratio will tend to provide a more useful starting point for analyzing a company’s chances of meeting its debt obligations.

That’s because like debt, market cap is a hard number. On the other hand, equity numbers are fuzzier. They mostly reflect asset values as they appear on the balance sheet at historical value. They may be too high, if the company’s assets have depreciated since the company acquired them. Or, they may be too low if the company’s assets have gained value since the company acquired them. This can happen with real estate and other investments.

The best blue chip companies have these characteristics—including dividends

We define a top blue chip company as a well-established company with attractive business prospects. Well-established stocks have the asset size and the financial clout—including sound balance sheets and strong cash flow—to weather market downturns or changing industry conditions.

Top blue chip stocks have strong positions in healthy industries. They also have strong management that will make the right moves to remain competitive in a changing marketplace.

Blue chip companies can give investors an additional measure of safety in volatile markets. And the best ones offer an attractive combination of moderate p/e’s (the ratio of a stock’s price to its per-share earnings), promising growth prospects, and steady or rising dividends.

Canadian dividend growth stocks should be a key part of a well-constructed portfolio

A well-constructed stock portfolio—which includes dividend-paying stocks—will make your life easier and maximize your gains.

When you try to pick a handful of stocks that will all beat the market, you are asking a lot of yourself. No one, not even people that devote their entire lives to it, has ever been able to consistently pick stock-market winners over long periods.

On the other hand, it’s relatively easy to acquire a balanced, diversified portfolio of mainly high-quality, dividend-paying stocks, spread out across most if not all of the five main economic sectors—Resources & Commodities, Finance, Manufacturing & Industry, Utilities and Consumer.

If you diversify, you improve your chances of making money over long periods, no matter what happens in the market.

By spreading your holdings out across most if not all the five sectors, you can avoid overloading yourself with stocks that are about to slump because of industry conditions or a change in investor fashion. By diversifying across the sectors, you increase your chances of stumbling upon a market superstar—a stock that does two to three or more times better than the market average.

Use our three-part Successful Investor approach while investing in Canadian dividend growth 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.

How do you handle buying dividend growth stocks when their price is dropping?

How often have you added more dividend growth stocks to your portfolio when the market was down?