Investors interested in building wealth through dividend investing should focus on top quality companies with long-term records of sustainable dividends—plus a number of other key factors
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.
Building wealth through dividend investing can be easier for Canadian taxpayers who hold Canadian dividend stocks because they can get a special bonus. Their dividends can be eligible for the dividend tax credit in Canada. This dividend tax credit will cut your effective tax rate.
Look for these characteristics when building wealth through dividend investing to make sure you’re getting the best stocks available
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.
The top dividend-paying stocks to invest in have strong positions in healthy industries. They also rely on strong management to make the right moves to keep them competitive in changing marketplaces.
For success in building wealth through dividend investing, look for stocks that have the following characteristics:
They provide regular income
They are one of the dominant firms in an industry
They feature hidden assets
They are high-quality, proven companies
They operate a well-established business
They have strong management
They have manageable debt
Above all, for a true measure of stability, focus on stocks that pay a dividend they’ve maintained or raised during economic or stock-market downturns. That’s because 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 also provide an attractive mix of safety, income and growth.
A track record of dividend payments is a strong sign of reliability and a sound indication that investing in the stock will be profitable for you in the future.
As we mentioned above, dividend history is very important to dividend growth stocks. Ideally, you should look for dividend growth stocks that have been paying dividends for 5 or more years. As a general rule, companies that make money regularly are safer than chronic or even occasional money losers. Companies can fake earnings, but dividends are cash outlays. If you only buy dividend-paying value stock picks, you’ll avoid most frauds.
Looking for hidden assets will help investors interested in building wealth through dividend investing
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.
Hidden value is one of the keys to building wealth through dividend investing, but you have to look closely to spot this value. At times, the hidden assets in a company’s real estate can even come to exceed the market value of its stock.
Borrowing to invest in dividend stocks can pay off—but it’s not without risks
As we indicated, over long periods, the total return on a well-diversified portfolio of high-quality stocks runs as much as 7.5% after inflation. So, in addition to the tax advantages, you can expect to earn more than your borrowing cost.
But borrowing to invest is not without risks, including the risk of increasing your leverage. The amount you owe on your investment loan will stay the same, regardless of what the market does, but every dollar your portfolio gains or loses will come out of your equity. In addition, if you take out a variable-rate loan, the interest rate you pay could eventually rise above the return on your stocks.
On the other hand, borrowing to invest can be a highly effective tax shelter. As mentioned, you deduct your interest expense against your current income. But the investment income you earn comes with three key tax advantages: you get the dividend tax credit on qualified Canadian stocks and you only pay income tax on half of your capital gains. In addition, you are only liable for capital gains when you sell; if you buy high-quality investments, you’ll wind up holding some of them for as long as you live. It’s a great tax-deferral technique. And it’s perfectly legal.
Still, borrowing to invest in dividend stocks only makes sense if all six of the following apply:
You are in the top income-tax bracket and expect to stay there for a number of years;
Your income is secure;
You have 10 or more years until retirement;
You follow our low-risk investment approach;
You have the kind of temperament to sit through the inevitable market setbacks without losing confidence at a market bottom and selling out to repay your loan;
You have already made your maximum RRSP contributions.
Building wealth through dividend investing is easier when you follow our three-part Successful Investor approach
Hold mostly high-quality, dividend-paying stocks.
Spread your money out across most if not all of the five main economic sectors: Manufacturing & Industry, Resources & Commodities, Consumer, Finance and Utilities.
Downplay or stay out of stocks in the broker/media limelight.
What other types of investments do you make in order to build wealth through your portfolio?
How much of your portfolio growth do you attribute to dividend investing?
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