We’ve always placed a high value on a strong record of paying dividends, mainly because it provides something of a pedigree for stocks we recommend. After all, you can’t fake a record of dividends. It takes a lot of success and high-quality management for a company to have the cash and the determination to declare and pay a dividend every year for five or 10 years or more. It’s not something you can create on the spur of the moment.

Now many investors have come to share our high regard for dividends, especially as a source of retirement income. However, some take this reliance on dividend stocks to extremes. They put too much faith in a history of dividend payments. They think of a stock with a good dividend history as the next best thing to a government bond.

But it’s nothing of the kind. It’s a good sign, but not the only sign you need to look for. It takes continuing effort to succeed as a so-called “buy-and-hold” investor. You need to learn how to “buy and watch carefully.”

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.  I consent to receiving information from The Successful Investor via email. I understand I can unsubscribe from these updates at any time.

Best defense against dividend drought is 3 key portfolio rules

Even the best dividend stocks can go through dividend droughts — periods when they have to cut or quit paying dividends due to setbacks within their company, their industry or the economy as a whole.

That’s why you still need to observe our three key portfolio rules, even when confining your investments to stocks with superb dividend records. They are:

1. Invest mainly in well-established companies.
2. Spread your money out across most if not all of the five economic sectors (Manufacturing & Industry, Resources & Commodities, the Consumer sector, Finance and Utilities). This cuts your risk of getting too heavily invested in an industry or sector that is headed for a slump. It also increases your chances of investing in a super stock with returns that are two to five times or more higher than the market averages.
3. Downplay or avoid stocks that are in the broker/media limelight. This limelight inflates investor expectations. When stocks fail to live up to those inflated expectations, downturns can be brutal.

Just remember that if you place too high a value on any single investment attribute, you may overlook signs of associated or offsetting risk. That’s something an investor needs to avoid at all times, but especially in retirement.

COMMENTS PLEASE—Share your investment knowledge and opinions with fellow TSINetwork.ca members

Have you had a stock you regarded as very reliable reduce or even cut its dividend altogether? Did the company’s explanation for its dividend cut make sense to you? Did you hold the stock, or did you sell it? Did that turn out to be a good or bad decision? Let us know what you think in the comments section below. Click here.