The highest paying dividend stocks are worth seeking, but only if their dividends are reliable

What to look for before investing in the highest paying dividend stocks

When you’re looking for income-producing stocks, the highest paying dividend stocks should be the focus of your most important investment considerations.

However, at the same time, the reliability of those dividends is important because a high dividend yield can also be misleading.

That’s why we place a high value on a sustained history of dividend payments.


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The highest paying dividend stocks are a sign of investment quality

Some good companies reinvest profit 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.

One of the best ways of picking a quality Canadian dividend stock is to look for companies that have been paying dividends for at least 5 to 10 years. Companies can trump up quarterly earnings, issue press releases to appear to be making strong progress, but they cannot fake dividends. Dividends are cash outlays that an unsuccessful company could never produce. A history of dividend payments is one thing that all the best dividend stocks have in common.

We look for Canadian dividend stocks that have industry prominence, if not dominance. Our reasoning, besides brand recognition, is that major companies can influence legislation, industry trends, etc. to suit themselves. Minor firms can’t do that.

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.

6 suggestions on finding the highest paying dividend stocks—and how to tell if they will keep paying it

  • Look for companies with long-term success.
  • Examine the current financial health of the company.
  • If a company currently offers a steady dividend, this is a good sign of its potential to continue.
  • Look for companies with a strong hold on a growing market and a unique product or service that cuts its competition.
  • 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.
  • Subscribe to TSI Network’s Dividend Advisor. When a dividend-paying stock grabs our attention, we write about it here.

The highest paying dividend stocks aren’t always reliable

To reiterate: a high dividend yield may be a danger sign. It may mean insiders are selling and pushing the price down. A falling share price makes a stock’s yield goes up (because you still use the latest dividend payment as the numerator to calculate yield—but the denominator, the price, has dropped). But when a stock does cut or halt its dividend, its yield collapses.

A classic case is the now defunct Yellow Pages Income Fund. When it first issued units in 2003, it was widely trumpeted by brokers and in the media as a well-established company (although we viewed it as the over-the-hill division of a formerly well-established company).

The company stayed in the limelight even though its high dividend yield—consistently above 10%—was a big warning sign. We never recommended the shares of Yellow Pages Income fund, advising investors to stay away from them.

In August 2011, the company’s credit rating was downgraded to junk status; in September 2011, it cut its dividend altogether. By then the yield was above 30%. The company has since restructured to cut its massive debt and re-emerged as Yellow Pages Ltd.—but the original shareholders of Yellow Pages Income Fund got nothing in the reorganization.

The highest paying dividend stocks can be a big part of long-term investment gains

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.

To summarize then, when it comes to investment safety, a long history of steady dividends is more important than a current high dividend yield.

Are you holding the highest paying dividend stocks in your portfolio? Share your story with us in the comments.

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