The Growing Power of Dividends

Learn everything you need to know in '7 Winning Strategies for Dividend Investors' for FREE from The Successful Investor.

The Best Canadian Dividend Stocks to Buy: REITS Canada and other Top Canadian Dividend Stocks.

Topic: Dividend Stocks

A sound Dividend Stock Investing Strategy includes both Growth & Value Stocks

A successful dividend stock investing strategy includes growth stocks plus value stocks that have a history of making dividend payments to investors

A dividend stock investing strategy is an important contributor to your long-term portfolio gains, and dividend-paying stocks tend to expose you to less risk than non-dividend-payers. That’s why we think the majority of your stocks should be dividend-payers at all times.

In addition, if you balance and diversify your portfolio as we recommend, your dividend-paying investments should also include both growth and value stocks.

The Growing Power of Dividends

Learn everything you need to know in '7 Winning Strategies for Dividend Investors' for FREE from The Successful Investor.

The Best Canadian Dividend Stocks to Buy: REITS Canada and other Top Canadian Dividend Stocks.

A dividend stock investing strategy that includes value stocks

Savvy value stock investors know that many value stocks consistently offer dividends with above-average yields, although capital gains may take longer to materialize.

Value stocks can test your patience by moving sluggishly for months, if not years. But they can make up for it by rising sharply when investors discover their true value.

While value stocks can offer the highest dividend yields, if a dividend-paying value stock seems like an exceptional bargain based on its dividend, earnings or asset values, it may harbour some hidden risks. The stock could plunge when those problems begin to emerge.

With our Successful Investor approach, we also recommend looking for value stocks that have an established track record of paying dividends. 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, 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.

As a general rule, companies that make money regularly are safer than chronic or even occasional money losers. If you only buy dividend-paying growth stock picks, you’ll avoid most frauds.

A dividend stock investing strategy that includes growth stocks

Investors generally look to growth stocks for capital gains and to more conservative stocks, like banks and utilities, for dividend income. Yet there are a number of dividend growth stocks that can also add to your current income. Some even have dividend yields that are as high—or even higher—than yields on more established companies.

As with conservative dividend-paying stocks, dividend growth stocks offer investors a measure of security. Generally, dividends are much more stable than earnings. More important, as we said earlier, dividends are impossible to fake—either the company has the cash to pay them or it doesn’t.

Although dividend growth stocks can be volatile, they often make good long-term investments. They may be well-known stars or quiet gems, but they do share one common attribute—they are growing at a higher-than-average rate within their industry, or within the market as a whole, for years or decades.

Take advantage of the dividend tax credit in your dividend stock investing strategy

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.

This means that dividend income will be taxed at a lower rate than the same amount of interest income.

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 Successful Investor philosophy when looking for dividend stocks:

  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.

How frequently do you look for dividend-paying stocks and what percentage of your holdings pay dividends?

Do you prefer growth stocks or value stocks for your portfolio? If they are dividend-payers, does that influence your decision?


  • Richard 

    I hold a mixture of growth and value stocks and dividends are important to me in retirement. Presently 70% of my stock portfolio are dividend payers as well as some growth. The other 30% are growth with little or no dividend such as CGI, Goggle and Visa. With Pat’s advice through his Inner Circle newsletters I have seen my stock portfolio double over the last 8 years by avoiding the many pitfalls in investing.

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