High dividend Canadian stocks are generally reliable—but be wary

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It’s important to find high-dividend Canadian stocks that have long-term value and avoid those that are only providing a false sense of security

We’ve always placed a high value on dividend stock investing at TSI Network, mainly because it provides something of a measure of safety 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 to declare and pay a dividend every year for five or 10 years or more. High dividend Canadian stocks are not something created on the spur of the moment.

One of the most concrete things about an investment is its dividend yield

A dividend yield is the percentage you get when you divide a stock’s current yearly dividend payment by its price. It’s an indicator we pay especially close attention to when we select stocks to recommend in our Canadian Wealth Advisor newsletter.

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But dividend yield, and high yield especially, can give you a false sense of security. Some investors in high dividend stocks have a natural tendency to think that all investment income is nearly as safe and predictable as bank interest. In fact, investment income can dry up in a heartbeat. Companies are sometimes unable to honour their commitments, and they sometimes spring the bad news on investors with no warning.

Rather than a sign of a bargain, high yield may be a danger sign. It may mean insiders are selling and pushing the price down. A falling price makes yield go up (because you use the latest dividend to calculate yield). When an investment does cut or halt its dividend, its yield collapses.

Still, if you stick with quality high dividend stocks, the income you earn can supply a significant percentage of your total return.

What are dividend stocks good for?

Dividend stocks rarely get the respect they deserve, especially from beginning investors. That’s because a yearly 2% or 3% or 5% dividend barely seems worth mentioning alongside possible yearly capital gains of 10%, 20% or 30% or more.

But dividends are far more reliable than capital gains. A stock that pays a $1 dividend this year will probably do the same next year. (It may even raise the rate to $1.02 or more).

Why high dividend Canadian stocks?

So why do we recommend Canadian dividends stocks so strongly? Canadian taxpayers who hold Canadian dividend stocks are eligible for the dividend tax credit in Canada. 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 23% on dividends, compared to 50% on interest income—investors in the higher tax bracket pay tax on capital gains at a rate of 25%.)

Seek out high dividend Canadian stocks with hidden assets

When researching Canadian dividend stocks, also take a close look at the balance sheet. Can you spot any hidden assets?

For instance, when a company buys real estate, the purchase price goes on its balance sheet as the historical value of the asset. Over a period of years or decades, the market value of that real estate may climb substantially. But the purchase price remains unchanged on the balance sheet.

You have to look closely to spot this hidden value. At times, the hidden assets in a company’s real estate can even come to exceed the market value of its stock.

Add the highest-quality stocks to your dividend stock portfolio

We think investors will profit most—and with the least risk—by buying shares of well-established, dividend-paying stocks with strong business prospects.

The best firms also have rising sales and profits and sound balance sheets, as well as a strong hold on a growing market. Additionally, they have strong management that will make the right moves to remain competitive in a changing marketplace.

Those are the kinds of stocks we recommend in our newsletters and investment services.

Our investment advice for dividend stocks

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.

Do you have high dividend Canadian stocks in your portfolio? How have they performed for you? Share your experience with us in the comments.


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