Dividend Stocks 101: Definitions for Investing in Dividend Stocks

Discover how dividend stocks can be the most profitable stocks in your portfolio

Dividend stocks make cash payouts that serve as a way for companies to share the wealth they’ve accumulated. These payouts are drawn from earnings and cash flow and paid to the shareholders of the company. Typically, these dividends are paid quarterly, although they may be paid annually or even monthly as well.

Top dividend stocks can be the most profitable stocks in your portfolio

Top dividend stocks can produce as much as a third of your total return over long periods.

Some good companies reinvest profits 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, top dividend stocks provide an attractive mix of safety, income and growth.

Canadian dividend stocks come with extra benefits

Canadian taxpayers who hold Canadian dividend stocks get a special bonus. Their dividends are 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 (investors in the highest tax bracket pay tax of around 29% on dividends, compared to 50% on interest income—investors in the higher tax bracket pay tax on capital gains at a rate of 25%.)

Canadian dividend stocks 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.

You should also keep these important points in mind:

  • Canadian dividends can grow.
  • Look for Canadian dividend stocks with consistency.
  • Canadian dividend stocks can have hidden assets.
  • The best Canadian dividend stocks dominate an industry.

6 ways to find the highest-paying dividend stocks—and how to tell if they will keep paying it

Good dividend stocks are a valuable component of any sound investment portfolio. But note, though, that when it comes to investment safety, a long history of steady dividends is more important than a current high dividend yield.

  1. Look for companies with long-term success.
  2. Examine the current financial health of the company.
  3. If a company currently offers a steady dividend, this is a good sign of its potential to continue.
  4. Look for companies with a strong hold on a growing market and a unique product or service that cuts its competition.
  5. Download my free report Dividend Paying Stocks: How High Dividend Stocks Can Supercharge Your Income Investing to build strength into your portfolio by investing in the best high-quality dividend stocks.
  6. Subscribe to TSI Network’s Dividend Advisor. When a dividend-paying stock grabs our attention, we write about it here.

How to find the best blue chip dividend stocks

The best blue chip dividend stocks offer both capital gains growth potential and regular dividend income. The dividend yield is certainly one of the most concrete indicators of a sound investment. It is the percentage you get when you divide the current yearly dividend payment by the share or unit price of the investment. It’s an indicator we pay especially close attention to when we select stocks to recommend in our investment newsletters and to our portfolio management clients.

We feel most investors should hold the largest part of their investment portfolios in securities from blue chip companies. Most of these stocks should offer good “value”—that is, they should trade at reasonable multiples of earnings, cash flow, book value and so on. Ideally, they should also have above-average growth prospects in expanding markets.

Characteristics of the best blue chip dividend stocks:

  1. Good blue chips have low debt
  2. Blue chip investments should have industry prominence if not dominance
  3. Good blue chip investments have the freedom to serve all shareholders

There are 4 key stock dividend dates that are involved with dividend payments:

  1. The Declaration Date is several weeks in advance of a dividend payment—it’s when company’s board of directors sets the amount and timing of the proposed payment.
  2. The Payable Date is the date set by the board on which the dividend will actually be paid out to shareholders.
  3. The Record Date is for shareholders who hold the stock before the payable date and receive the dividend payment. That date is set any number of weeks before the payable date.
  4. The Ex-Dividend Date is two business days before the record date and it’s when the shares begin to trade without their dividend. If you buy stocks one day or more before their ex-dividend date, you will still get the dividend. That’s when a stock is said to trade cum-dividend. If you buy on the ex-dividend date or later, you won’t get the dividend. The ex-dividend date is in place to allow pending stock trades to settle.


Dividends make the difference

The best dividend stocks will turn an average portfolio into a strong, fast-growing one. Pat McKeough has spent years showing investors how to convert high-quality dividend stocks into greater earning power. Now he shows you how to make it work for you in his complete guide to dividend investing. Get his free report now.

Read this NEW free report >>


Follow our three-part Successful Investor strategy

Limit your risk by investing in most if not all of the five main economic sectors. Also, follow our three-part Successful Investor strategy:

  • Invest mainly in well-established companies;
  • Spread your money out across most if not all of the five main economic sectors (Manufacturing & Industry; Resources & Commodities; the Consumer sector; Finance; Utilities);
  • Downplay or avoid stocks in the broker/media limelight.

Are you holding stocks paying the highest dividends? How long have they been part of your diversified portfolio? Share your experience with us in the comments.

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