The best Canadian blue chip dividend stocks will give you both income & growth. Here’s how to find them

best blue chip dividend stocks

Investing in Canadian blue chip dividend stocks is a key step in building a successful portfolio. But to find the best of them, you’ll need to look for these key traits—including hidden assets

A company with a long-term record of paying dividends is generally one that is most deserving of the “blue chip” label. Dividends, after all, are much more stable than earnings projections. More importantly, dividends are impossible to fake—either the company has the cash to pay them or it doesn’t.

The best Canadian blue chip dividend stocks offer both capital gains growth potential and regular dividend income.

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Look for these characteristics to find the best Canadian blue chip dividend stocks 

  • Good blue chip companies have the freedom to serve (all) shareholders
  • Geographic diversification
  • Good blue chips have manageable debt
  • Most of the best blue chip investments pay dividends
  • Industry prominence if not dominance

The best stocks also have hidden assets that can, for example, come out of existing strong brand names and can help launch new products. They can also grow out of government obstacles to the entry of new competitors into a market.

Some blue-chip companies may have a hidden asset in their relationship with loyal customers. After a series of satisfactory dealings, long-time customers develop a level of trust that makes them receptive to related offerings from the company. For example, Apple Computer was able to move into the digital music player and smartphone businesses as quickly as it did because of the established core of fans for its Mac computers. The best Canadian blue-chip stocks may also have hidden assets in the form of real estate.

Zero in on sustainable income when looking for the best Canadian blue chip dividend stocks

Income stocks are stocks that produce above-average income, usually in the form of dividends.

An income stock usually has two distinct traits. You can identify income stocks by their high dividend yields (the percentage you get when you divide a company’s current yearly payment by its share price). For example, stocks with a dividend yield higher than, say, 3% would typically be attractive to an income-seeking investor. Investors should note, though, that a very high dividend yield can also be a warning sign of trouble (such as an imminent dividend cut).

Apart from a high dividend yield, you should look for a second trait: stocks that have a long history of paying (and raising) their dividends. In determining how to get dividends from stocks, this is one of the most important factors.

Meantime, if you’re an income stock investor, you may wish to place more emphasis on Utilities and Canadian banks. That’s because these firms generally pay high, secure dividends, and have long histories of raising their payments, even during downturns. However, you’ll still want to make sure your portfolio is well-diversified across most if not all of the five sectors. 

The payout ratio of Canadian blue chip dividend stocks is a good way to help assess their dividend sustainability

One of the best ways to judge whether a company will keep paying its dividend, or even increase it, is the dividend payout ratio. This simply measures what portion of a company’s earnings are allotted to paying dividends.

If a company keeps its payout ratio fairly steady, say at 7% of earnings, and its earnings grow, the amount you receive in dividends should also grow. However, if a company must keep paying out a larger and larger percentage of its earnings just to maintain the dividend, it is reasonable to wonder whether the company is in decline and the dividend is in danger of being cut.

You need to look at other factors, as well, of course. The company may be going through a low cycle in its industry, or have a temporary problem it has a good chance of solving.

Take advantage of the dividend tax credit when investing in Canadian blue chip dividend stocks 

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—which is available on dividends paid on Canadian stocks held outside of an RRSP, RRIF or TFSA—will cut your effective tax rate.

Meanwhile, if you include top-quality dividend stocks in your portfolio, 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.

Use our three-part Successful Investor approach to help you find the best Canadian blue chip dividend stocks  

  1. Invest mainly in well-established, dividend-paying companies;
  2. Spread your money out across most if not all of the five main economic sectors (Manufacturing & Industry; Resources & Commodities; the Consumer sector; Finance; Utilities);
  3. Downplay or avoid stocks in the broker/media limelight.

How do you do your best to stay away from overvalued blue chip stocks?

Have you invested in blue chip stocks that turned out to be poor investments?

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