Look for companies with a strong hold on their market, a history of sustainable dividends, and more when trying to find the best Canadian blue-chip stocks that pay high dividends

Investors new to us always ask for the best Canadian blue-chip stocks that pay high dividends. But they’re asking the wrong question. Let’s talk about it.

Top-quality stocks tend to lose less of their value with the kind of severe downturn that global markets suffered at the start of the COVID-19 pandemic in March 2020. They also tend to bounce back nicely when conditions improve. These are the kind of stocks we continue to recommend in our newsletters and other services.

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To build a portfolio of those stocks—and to show the best long-term results, we still think you should stick with our three-part program:

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.

Do you want to find Canadian blue-chip stocks that pay high dividends and meet our Successful Investor criteria? First, let’s take a look at what makes a blue-chip stock.

The best blue chips offer both capital gains growth potential and regular dividend income. The dividend yield is certainly one of the most concrete indicators of a sound investment. It 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 we pay especially close attention to when we select stocks to recommend in our investment newsletters.

Here’s how to find Canadian blue-chip stocks that pay high but reliable dividends

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, they provide an attractive mix of safety, income and growth.

One of the best ways of picking quality, high-yield dividend stocks is to look for companies that have been paying dividends for at least 5 to 10 years. As a general rule, companies that make money regularly are safer than chronic or even occasional money losers. Companies can trump up quarterly earnings, or issue press releases to appear to be making strong progress, but they cannot fake dividends. Dividends are cash outlays that an unsuccessful company could never produce. If you only buy dividend-paying value stock picks, you’ll avoid most frauds.

Top Canadian blue-chip stocks that pay high dividends will have these characteristics:

• The best blue-chip companies have low debt: The company under consideration should have manageable debt. When bad times hit, debt-heavy companies often go broke first.
• Blue-chip investments should have industry prominence if not dominance: Major companies can influence legislation, industry trends and other business factors to suit their needs.
• Top blue-chip investments have the freedom to serve (all) shareholders: High-quality stock picks must be free of excess regulation, free of dependence on a single customer, and free from self-dealing insiders or parent companies.
• The top blue-chips to invest in will often have hidden assets: These hidden assets are most valuable before they are realized by the wider investing community. These hidden assets may come in a variety of areas, including real estate or highly respected brands.
• Blue-chip companies find a way to remain vital: These companies hold strong positions in healthy industries. They also have strong management that will make the right moves to remain competitive in a changing marketplace.
• Canadian blue-chips can lead to tax breaks: Canadian taxpayers who hold Canadian dividend stocks can be 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.
• The best blue-chip investments have geographical diversification. Canada-wide is good, multinational is better. There’s extra risk in firms confined to one geographical area.

Don’t judge Canadian blue-chip stocks that pay high dividends solely on their high dividend yield

It’s important to avoid judging a company based solely on its dividend yield (the percentage you get when you divide a company’s current yearly dividend payment by its share price).

That’s because a high yield can sometimes be a danger sign rather than a bargain. For example, a dividend stock’s yield could be high simply because its share price has dropped sharply in anticipation of a dividend cut.

We recommend that you look beyond dividend yield when making investments in high-growth dividend stocks. Look for dividend stocks that have also established a business and have a history of building revenue and cash flow.

What percentage of your dividend payments go straight back into share purchases?

This article was initially published in 2015 and is regularly updated.