Here’s how to find top Canadian dividend-paying stocks for a safer retirement

investment planning for retirement

Invest in the top Canadian dividend-paying stocks, and boost your portfolio returns for more income in your retirement

We’ve always placed a high value on top Canadian dividend-paying stocks with a record of dividends, mainly because that kind of track record provides something of a pedigree for stocks we recommend.

Many investors have come to share our high regard for dividends, especially as a source of retirement income. However, some take it 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.”


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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Invest in the top Canadian dividend-paying stocks now and you can live off the income in your retirement

Dividends play a very important role in retirement, but not quite the way people think of it. A history of five or ten years of dividends, is, as we mentioned, a kind of a pedigree for a stock. It tells you the stock has been looking after its investors for a good period of time.

And that record of dividend payments is something you can’t fake. So it’s a very good idea in retirement to confine your buying mostly to stocks that have a dividend record, not just a current dividend.

But if you’re investing the way most stock market investors do, there’ll be some years when you need to sell things, whether it’s a stock that’s being bought in a takeover, or whether it’s come to be too big a part of your portfolio. Then that’s something you’re going to want to look at selling all or part of. And when that happens, capital gains are every bit as spendable as dividends.

Some investors think the best strategy is to set up a portfolio with good-quality stocks, and then forget about it. We think it’s a mistake to do that. Some people think that buy-and-hold means buy and forget about it, but it really should be buy, hold and watch carefully.

And when you do that with stocks that pay dividends, you have fewer unpleasant surprises and a better, more stable source of retirement income.

Seek the best stock buybacks in addition to the top Canadian dividend-paying stocks for even more portfolio growth

It’s odd that while investors periodically crave cash dividends, they rarely get excited about stock buybacks. But in some ways, stock buybacks are better than dividends. In particular, they give you a tax-deferral option that you don’t get with cash dividends.

Stock buybacks raise the value of a given stock holding in two ways:

First, stock buybacks raise a company’s earnings per share. It’s simple arithmetic: buybacks reduce the number of shares outstanding. To get earnings per share, you divide total earnings by the number of shares outstanding. When you reduce the divisor—because the company has fewer shares outstanding, due to stock buybacks—the calculation gives you a higher number for earnings per share as an answer. On the whole, buyers are willing to pay slightly more for a stock with slightly higher earnings per share.

Second, when the company buys back its own stock in the market, it bids up the price of the stock.

The funny thing is that, just as investors tend to underestimate the value of a buyback, they overestimate the value of a dividend reinvestment program. They put a high value on the fact that they can reinvest their dividends automatically, without paying brokerage commissions. They fail to recognize that brokerage commissions are now at historic lows. They also overlook the fact that they have to pay taxes on the full dividend for the year in which they receive it, even if they reinvest it.

Use our three-part Successful Investor approach to select the top Canadian dividend-paying stocks

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

  • Invest mainly in well-established, mostly dividend-paying companies.
  • 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.
  • 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.

A high dividend yield can be a sign of danger. How do you ensure you are making good decisions with your dividend investing?

What kind of stocks do you have in your portfolio for retirement income?

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