The best ways to invest money include dividends

Ensuring your stock picks have a history of dividend payments and growth are two of the best ways to invest money for conservative investors looking for safer investments

With our Successful Investor approach, we consider stocks that have been paying dividends for over 10 years to be some of the safest investments. Dividends are a sign of quality and a company’s financial health, types of stocks that we consider to be safer investments include Canadian banks and utilities.

Conservative investing can also include taking advantage of compound interest, earning interest on interest (or dividends on dividends). This can have an enormous ballooning effect on the value of an investment over the long term. Long-term gains are not made by worrying about current stock price fluctuations. Conservative investors know to look for investment quality first.


When to trust your dividends

“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…”
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The best ways to invest money: Look for steady dividends

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.

One of the best ways of picking quality dividend stocks that meet our Successful Investor criteria is to look for companies that have been paying dividends for at least 5 to 10 years. Companies can trump up quarterly earnings and 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 thing in common that all the best dividend stocks have.

We look for dividend stocks that have industry prominence, if not dominance. Our reasoning, besides brand recognition, is that major companies can influence legislation and industry trends to suit themselves. Minor firms can’t do that.

The best ways to invest money in dividend-paying stocks: Know how dividends are taxed

Taxpayers who hold Canadian dividend-paying stocks get a tax break. Their dividends can be eligible for the dividend tax credit in Canada. This means that dividend income will be taxed at a lower rate than the same amount of interest income.

Investors in the highest tax bracket pay tax of 29% on dividends, compared to about 50% on interest income.

Investors in the highest tax bracket pay tax on capital gains at a rate of roughly 25%.

Dividends don’t always get the respect they deserve, especially from beginning investors. A dividend stock’s yearly 2% or 3% or 5% yield may not seem like much to many investors, yet 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 rise to $1.05.

How the safest stocks reflect the best ways to invest money

A conservative investor is someone who builds a stock portfolio with the goal of achieving steady returns, including dividends, while maintaining a lower level of risk. Safer investments are stocks that come with a reasonably high degree of stability and lower risk.

Conservative investments also call for a healthy sense of skepticism: A cardinal rule: If an investment sounds too good to be true, it probably isn’t true.

A conservative investing strategy typically involves the purchase of blue-chip stocks and other low-risk investments. Diversification is also a key part of conservative investing.

There are also a host of key indicators to determine if a security is a safer investment, like management integrity, its growth prospects and its stock price in relation to its sales, earnings, cash flow and so on.

By following our conservative Successful Investor philosophy, you can reach what we’d call the best of all possible investment worlds—a heads-you-win-tails-you-break-even situation. When times are good, following that philosophy can be extraordinarily profitable. But during the inevitable market downturns, it cuts your losses and leaves you well-positioned to profit again in the inevitable recovery.

Have you ever attempted to minimize the volatility of your portfolio but ended up created higher levels of risk at the same time?

Which of these low-risk strategies have you used to improve your portfolio?

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