Looking for the best dividend-paying stocks for the long term? Here’s what to watch for to maximize gains and minimize risk

If you stick with top-quality, high-dividend-yield stocks, the income you earn can supply a significant percentage of your total return—as much as a third of your gains. And at the same time, dividends are more dependable than capital gains as a source of investment income.

The best dividend-paying stocks for the long term are a valuable component of any sound investment portfolio. Note, though, that when it comes to investment safety, a long history of steady dividends is usually more important than a current high dividend yield.

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We think that dividend stocks rarely get the respect they deserve from investors. But with today’s low interest rates, savvy investors are paying more attention to dividend yields (a company’s total annual dividend amount paid per share divided by the current stock price). Top dividend-paying companies are responding by doing their best to maintain, or even increase, their payouts.

Watch for these characteristics of the best dividend-paying stocks for long-term portfolio gains

• The best dividend stocks offer sustainable dividends: It’s important to watch out for unusually high dividend yields—that could mean an unsustainable dividend. Investors should avoid judging a company based solely on its dividend yield. That’s because a high yield can sometimes be a danger sign rather than a bargain.
• The best dividend stocks will include these positive financial factors: As a general rule, companies that make money regularly are safer than chronic or even occasional money losers. If you only buy dividend-paying stocks, you’ll avoid most frauds. Furthermore, the more manageable the 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.
• The best dividend stocks have hidden assets: Successful investors recognize that hidden assets are a great way to cut risk, for conservative and aggressive investors alike. One great example is research and development.

As well, we also look for 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.

Dividend stocks are an important contributor to your long-term gains, and, as mentioned, dividend-paying stocks typically expose you to less risk than non-dividend-payers. That’s why the majority of your stocks should be dividend-payers. What’s more, 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.

Look for Canadian bank stocks with consistent dividends to add to your portfolio

One of the best ways to add a quality stock is to look for banks that have been paying dividends for at least 5 to 10 years—and that includes the big-five Canadian banks. A history of dividend payments is one trait that all the best dividend stocks have.

Take an especially close look at growth stocks that pay dividends to see if those payouts are sustainable long term

When considering buying growth-stock picks that pay dividends, start by putting all the important information you know about a company into perspective. For instance, while its new invention may be a marvel, how does it compare to what the competition is doing? Its new project may sound impressive, but how much impact will it really have on the company’s profit?

Use our Successful Investor approach to build a top-notch portfolio

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.

What aspect of dividend stocks is most appealing to you?