Discover the best dividend-paying stocks for your (successful) portfolio

top dividend-paying stocks

Putting the best dividend-paying stocks into your well-diversified portfolio will help you make more income right now—and more gains in the long run

The best dividend-paying stocks rarely get the respect they deserve, especially from beginning investors. Here’s why, and here’s how to spot them:


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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Focus on a sustainable dividend yield to find the best dividend-paying stocks for income

A dividend is allotted as a fixed amount of money per share so that shareholders receive a total payment that is proportionate to the shares they hold. Most dividends are paid quarterly, although some companies pay a monthly, or even annual, dividend, or distribution.

The dividend yield is one of the important ratios to calculate for dividend stocks. It’s calculated by dividing the total annual dividend amount per share by the current stock price. Movements in the stock price will change the dividend yield. When you’re looking for income-producing stocks, dividend yield is typically one of your most important considerations.

The best companies to invest in for a high dividend yield have strong positions in healthy industries. For a true measure of stability, though, focus on those companies that have maintained or raised their dividend yields 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—and are a big part of a successful long-term investment strategy.

Invest in the best dividend-paying stocks and enjoy the benefits of the dividend tax credit

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—available for dividends paid on Canadian stocks held outside of an RRSP, RRIF or TFSA—cuts your effective tax rate.

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 around 29% on dividends, compared to 50% on interest income. At the same time, investors in the highest tax bracket pay tax on capital gains at a rate of about 25%.

Look for market leaders to find the safest dividend-paying stocks

The safest dividend stocks that we recommend as part of our Successful Investor approach are leaders in their fields, and they incorporate strong management that makes the right moves to remain competitive in a changing marketplace.

Dividends in general are a sign of investment quality. Some good companies reinvest profit to spur growth instead of paying dividends. But fraudulent and failing companies are hardly ever dividend-paying stocks. So if you only buy stocks that pay dividends, you’ll automatically stay out of almost all the market’s worst stocks.

Use these five tips to pick the best dividend-paying stocks

  1. High quality stocks + high quality dividends = a winning combo
  2. Look for a history of paying a dividend
  3. Look for companies that raise their dividends
  4. The best dividend stocks feature hidden assets
  5. Watch out for stocks with an unusually high dividend yield

Investing in the best dividend-paying stocks leads to portfolio growth

Dividends are an important contributor to your long-term gains, and dividend-paying stocks tend to expose you to less risk than non-dividend-payers. That’s why the majority of your stocks should be dividend-payers at all times. As you get older and closer to retirement, you should raise the proportion of dividend-paying stocks in your portfolio, to cut risk and improve the stability of your investment results.

Dividend-paying stocks are an essential part of a successful investment portfolio.

Use our three-part Successful Investor approach to find the best dividend-paying stocks on the market

  1. Invest mainly in well-established, dividend-paying companies, with a history of rising sales if not earnings and dividends.
  2. Spread your money out across most if not all of the five main economic sectors: Manufacturing & Industry; Resources & Commodities; Consumer; Finance; Utilities.
  3. Downplay or avoid stocks in the broker/media limelight. When stocks spend time in the limelight, they tend to become overpriced, and this leaves them vulnerable to a sharp downturn on any hint of bad news. Instead, look for stocks with hidden value that are less widely recognized—at least so far—as attractive investments.

Often younger investors regard dividends as overrated. What’s your opinion on dividends as a key factor in deciding on stocks to buy?

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