Good Stocks to Buy Will Most Often Have a Proven History of Paying Dividends—and More

best Canadian stocks to buy and hold

Good stocks to buy typically have a history of dividend payments, but they are also not in  the media limelight

In general, good stocks to buy will 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.

Here are some additional factors to consider when looking for good stocks to buy:

Find good stocks to buy that pay a reliable dividend

You can’t fake a record of dividends. That’s why we place a high value on a sustained history of dividend payments.

If you stick with top-quality high dividend yield stocks, 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.

Note, though, that when it comes to investment safety, a long history of steady dividends is more important than a current high dividend yield.

In short, good dividend stocks are a valuable component of any sound investment portfolio.

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.

Stick with our three-part system to find good stocks to buy—and more on our third rule

Our Successful Investor philosophy has three key rules:

  1. Invest mainly in well-established stocks with a history of sales and earnings, if not dividends;
  2. Spread your money out across most if not all of the five main economic sectors—Manufacturing & Industry, Resources & Commodities, Consumer, Finance and Utilities;
  3. Downplay or avoid stocks in the broker/media limelight.

This third rule is less familiar than the first two, but every bit as crucial. That’s because it helps to protect you from the potentially costly side effects of human nature.

Many good stocks are well-known, well-managed and widely followed—“household names”, as some investors refer to them. That’s a good description of most of the stocks we analyze and recommend. However, the broker/media limelight is far more exclusive.

This limelight is where you’ll find stocks that are doing a lot of underwriting business with the brokerage industry, for acquisitions, stock and bond issues, and so on. Underwriting generates a lot of fees, and a lot of newsworthy business developments. The limelight companies just naturally spend a lot of money and devote a lot of high-priced help to take advantage of this media attention and gain a more favourable media profile.

Naturally, brokerage analysts devote a lot of time to studying and reporting on these companies. They want their investor clients to see their underwriting clients in a favourable light, particularly when they are underwriting a new stock or bond issue.

Nothing wrong with any of this, of course. But it has predictable side effects. Companies, employees and consultants tend to see a lot of value in the work of their customers, employers and clients. The media generally like to produce stories about business ambition and success, because everybody loves a winner. This situation tends to give investors a highly favourable impression of stocks in the broker/media limelight.

Then too, all this favourable media attention can generate a sense of hubris in managers of the limelight companies. This leads some to make enormous, devastating errors.

We’d be overstating things if we said that stocks in the broker/media limelight can do no wrong in the eyes of brokers and the media. But it would be just as misleading to say that brokers and the media take an even-handed, impartial view of the limelight stocks that make their jobs so much easier and more profitable. Instead, the limelight casts a soft, forgiving light on these companies. This spurs investor expectations to unrealistically high levels. When stocks fail to live up to those high expectations, stock price downturns can be brutal and sometimes permanent.

Bonus Tip: Do not expect to pay below market prices for good stocks to buy

Some investors look to buy stocks like a smart consumer buys a car. But they overlook a key difference. Car prices do vary, and some buyers do pay less than others, because they have better bargaining skills and more time to spend shopping around.

However, the stock market is more efficient than the car market, as an economist would put it. To get a lower price on a stock, you have to wait for its price to come down.

If you always try to buy below the market, you’ll always get a “fill” on stocks with hidden flaws. They’ll always come down into your buying range … and they’ll keep on falling.

But you’ll never get to buy the other kind of stock—the kind that keeps going up. They’ll always seem too expensive, and they’ll go on to get even more expensive. But you need a few of these ever-more expensive stocks to offset the losses from those that get cheaper and cheaper.

Dividend investing can obscure the amount of risk an investor takes on. How do you handle the risk associated with a dividend-paying company?

How much of your portfolio do you dedicate to dividend stocks?


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