Investing in the best dividend stocks is key to your long-term investment results. Here are six tips to help you find them.
The best dividend stocks provide a consistent dividend yield year after year. That’s key to your long-term investment success, because those dividends can contribute as much as a third of your total return.
Even though the best dividend stocks can be your most profitable investments, dividends rarely get the respect they deserve, especially from beginning investors. That’s because a dividend-paying stock’s yearly 2% or 3% or 5% yield barely seems worth mentioning alongside yearly capital gains of 10%, 20% or 30% or more.
But dividends are far more reliable than capital gains. A stock that pays a dividend of $1 this year will probably do the same next year. It may even raise it to $1.05.
Dividends Look Better than Ever Dividend income is always welcome—and it looks even better in troubled markets. Low interest rates have kept investors looking to dividend stocks for income, and many companies are still raising their dividends. Which dividend stocks will do the most for you? Get the answers in Pat McKeough’s free report, “How High Dividend Stocks Can Supercharge Your Income Investing.”
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Good dividend stocks are a valuable component of any sound investing portfolio. And here are six tips for picking the best dividend stocks.
- Dividends can grow. Stock prices rise and fall. Interest on bonds or GICs holds steady, at best. But the best dividend stocks like to ratchet their dividends upward over time—holding them steady in a bad year, and raising them in a good one. That also gives you a hedge against inflation.
- Dividends 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. 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.
- Watch out for unusually high dividend yields. Investors should avoid judging a company based solely on its dividend yield (the percentage you get when you divide a company’s current yearly 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 paying stock’s yield could be high simply because its share price has dropped sharply (because you use a company’s share price to calculate yield) in anticipation of a dividend cut. That’s why we recommend that you look beyond dividend yield when making investment decisions, and look for companies that also have established a sound business and have a history of building revenue and cash flow.
- A history of paying a dividend. One of the best ways of picking a quality dividend stock is to look for companies that have been paying dividends for at least 5 to 10 years. Companies can trump up quarterly earnings, 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. A history of dividend payments is one commonality that all the best dividend stocks have.
- The best dividend stocks can feature hidden assets. When researching the best dividend stocks, also take a close look at the balance sheet. Can you spot any hidden assets? For instance, when a company buys real estate, the purchase price goes on its balance sheet as the historical value of the asset. Over a period of years or decades, the market value of that real estate may climb substantially. But the historical purchase price remains unchanged on the balance sheet. You have to look closely to spot this hidden value. At times, the hidden assets in a company’s real estate can even come to exceed the market value of its stock.
- The best dividend stocks dominate their markets. We look for Canadian 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.
What are some the best dividend stocks you’ve ever invested in? Do you have any additional tips to share for finding the best dividends stocks? Share your experience with us in the comments.
