Invest in Companies that Pay Dividends to Increase Income Growth

Find and invest in companies that pay dividends and you will be putting your money behind stocks that come with a history of success with lower amounts of risk

Income stocks are those that produce above-average income, usually in the form of dividends.

Even if you don’t need current income from your portfolio, you still may want to invest in companies that pay dividends. When you pick the best dividend stocks, you are, for the most part, investing in safer and more secure companies. That’s in large part because of the dividends that the best income stocks pay. Dividends, after all, are much more stable than earnings projections.


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.



Look to invest in companies that pay dividends for long-term portfolio growth

If you’re new to investing, one tip we share often is to invest mostly in companies that have been paying a dividend for five or more years. Dividends are typically cash payouts that serve as a way for companies to share the wealth they’ve accumulated. These payouts are drawn from earnings and cash flow and paid to the shareholders of the company. Typically these dividends are paid quarterly, although they may be paid annually or even monthly. Canadian citizens who own shares in Canadian stocks that pay dividends will also benefit from a special dividend tax credit they may be eligible to receive.

Look for these characteristics when you invest in companies that pay dividends to guarantee you’re getting the best stocks available

The top dividend-paying stocks to invest in have strong positions in healthy industries. They also rely on strong management to make the right moves to keep them competitive in changing marketplaces.

The top dividend-paying stocks have the following characteristics:

  • They provide regular income
  • They are one of the dominant firms in an industry
  • They feature hidden assets
  • They are high-quality, proven companies
  • They operate a well-established business
  • They have strong management
  • They have manageable debt

Above all, for a true measure of stability, focus on stocks that pay a dividend they’ve maintained or raised during economic or stock-market downturns. That’s because these firms leave themselves enough room to handle periods of earnings volatility. By continually rewarding investors, and retaining enough cash to finance their businesses, they also provide an attractive mix of safety, income and growth.

A track record of dividend payments is a strong sign of reliability and a sound indication that investing in the stock will be profitable for you in the future.

Follow these key dates when you invest in companies that pay dividends so you can claim your full profits

Declaration Date: Several weeks in advance of a dividend payment, a company’s board of directors sets the amount and timing of the proposed payment. The date of that announcement is known as the declaration date.

Payable Date: Is the date set by the board on which the dividend will actually be paid out to shareholders.

Record Date: Only shareholders who hold the stock before the payable date will receive the dividend payment. That date is known as the record date. It’s set any number of weeks before the payable date.

Ex-dividend Date: Two business days before the record date, the shares begin to trade without their dividend. This date is the ex-dividend date. If you buy stocks one day or more before their ex-dividend date, you will still get the dividend. That’s when a stock is said to trade “cum-dividend,” or “with dividend.” If you buy on the ex-dividend date or later, you won’t get the dividend. The ex-dividend date is in place to allow pending stock trades to settle.

Invest in companies that pay dividends within these sectors for the greatest growth in your portfolio

Utilities and Canadian banks generally pay high, secure dividends, and have long histories of raising their payments, even during downturns. However, you’ll still want to make sure your portfolio is well-diversified across most if not all of the five sectors.

While we continue to recommend that you spread your investments out across the five main economic sectors (Manufacturing & Industry; Resources; Consumer; Finance; and Utilities), the proportion of holdings you devote to each sector depends on your temperament and financial goals.

For example, if you’re an income investor, you may wish to place more emphasis on the Utilities and Canadian banks. That’s because these firms generally pay high, secure dividends, and have long histories of raising their payments, even during downturns.

By diversifying across most if not all of the five sectors, you avoid overloading yourself with stocks that are about to slump simply because of industry conditions or investor fashion.

You also increase your chances of stumbling upon a market superstar—a stock that does two to three or more times better than the market average.

Invest in companies that pay dividends by using our three-part Successful Investor approach

  1. Hold mostly high-quality, dividend-paying stocks.
  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 stay out of stocks in the broker/media limelight.

How much consideration do you give to a company’s stated commitment to its dividend?

Comments

Tell Us What YOU Think

You must be logged in to post a comment.

Please be respectful with your comments and help us keep this an area that everyone can enjoy. If you believe a comment is abusive or otherwise violates our Terms of Use, please click here to report it to the administrator.