6 tips for picking the best dividend stocks for your portfolio

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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.

  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. 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.
  6. 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.

Comments

  • Jim D.

    The best dividend paying stocks I ever invested in are the Canadian Bank Stocks. I was first introduced to the benefits of buying Canadian Bank Stocks while on a business trip through Canada’s Northwest Territories in July of 1984 when I was working for the National Energy Board. A wise older male colleague explained the benefits of buying Canadian Bank Stocks, not only for the prospects of capital appreciation but for the steady value of the dividend payments that you will receive especially at times when the capital markets are not appreciating. He also explained that when the markets conditions improve and share prices begin to appreciate again it is common for the banks to increase their dividends. I bought shares in BNS at around $10.50 per share (note the stock had split 3-1 in January 1984). His words could not have been truer. When the National Energy Board moved to Calgary in 1991, I moved on to a career with the Office of the Superintendent of Financial Institutions to remain working in Ottawa. I was not allowed to own any Bank stocks during my period at OSFI. Consequently I had to divest of my BNS shares. They were valued at just over $19.00 per share. To say I was hooked on bank stocks would be an understatement. As soon as I retired from the federal government, I again purchased bank shares and today hold four of the big five banks in Canada in my portfolio along with other high quality dividend paying companies. At my current age, I am looking for solid dividend paying stocks and follow Pat McKeough’s advice through his newsletters religiously, simply because I believe in his approach as I prefer the slower steadier approach to financial wellbeing as it allows my wife to sleep much better at night. Another gentleman on the 1984 trip who worked for the National Canada Power Commission also gave me some sage advice over a couple of “soda pops one night in Whitehorse. He described wealth to me in very simple terms – “When your income from investments equals your salary, you have true financial independence because you could lose your job tomorrow and be able to live off your investment income until you can find a better job (that of course assumes you haven’t lived well beyond your means prior to losing your job). My only regret was that I did not hear this advice at a much younger age, as I would have begun investing in strong companies with a history of paying and steadily increasing dividends much earlier. Why don’t they teach smart investing in our schools.

  • Jim D.

    Just following up on my previous comments. The best tip I could give readers especially those who invest in bank stocks is to truly understand the impact of how increases/decrease in non-performing assets impact share prices. In soft economic conditions – the value of non-performing assets usually increase significantly, which usually results in a decrease in share price. Once the economy starts to improve, non-performing assets decrease resulting in a solid boost to the share price.

  • Mr Dolan,
    non performing “assets ” is a term that requires more explanation .What defines a non performing “asset”? How does one dig deeper? Are these assets classed as a liability once they are judged to be non performing ?

  • Edward B.

    I have a portfolio of 20 dividend paying stocks; Canadian banks, pipelines, utilities, telcom, industry and reits and average about $2500 monthly in dividends. To date the best performers are: BCE(33.3%),BIP.UN(30.2%$),EMA(48.12%),MST.UN(25.6%),NFI(35.61%),TD(20.8%).
    Seven others are in the 10-19% range and every one of the 20 is in the green. I follow the TSX daily and trade regularly if any stock performs poorly. We also have substantial TFSAs, and both are doing well.

  • gerry k.

    When BMO (dropped to) $30 during the 2007-8 crisis and was paying near 10% dividend yield I piled in.
    Having experienced previous market shocks, I was confident this too would pass. I also recalled John Dillon’s reply to “why rob banks?” “Because that’s where the money is.” (I also bought into 3 other Cdn banks which in total make up half my non-registered portfolio). Fortunately, Canadian banks had not been allowed to deregulate and so hadn’t been robbed the way the US banks had by their own “managers”.(Kudos to our government for resisting the pressure.)
    My reward over the past 8 years has been a nice non-taxed dividend (under $4k/month)and more than doubling of the stock.
    I am one very happy senior.

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