Invest in high-quality dividend-paying stocks for maximum portfolio growth

Include high-quality dividend-paying stocks in your portfolio to cut risk while at the same time generating both capital gains and income

Investors generally look to growth stocks for capital gains and to more conservative stocks, like banks and utilities, for dividend income.

We think that’s a sound strategy: If you include high-quality dividend-paying stocks in your portfolio, 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.

You can realize significant tax benefits from Canadian high-quality dividend-paying stocks

You pay tax on dividends in the year you get them, if you hold the shares in a cash account and outside of your RRSP, RRIF or TFSA. However, dividends on Canadian companies held outside of one of those registered accounts receive favourable tax treatment in Canada, thanks to the dividend tax credit.

This dividend tax credit will cut your effective tax rate. 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 29% on dividends, compared to 50% on interest income. At the same time, investors in the highest tax bracket pay tax on capital gains at a rate of about 25%.

Watch for these characteristics to find the best high-quality dividend-paying stocks for your portfolio

The best blue chip dividend stocks 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 and to our portfolio management clients.

We feel most investors should hold the largest part of their investment portfolios in securities from blue chip companies. Most of these stocks should offer good “value”—that is, they should trade at reasonable multiples of earnings, cash flow, book value and so on. Ideally, they should also have above-average growth prospects in expanding markets.

Characteristics of the best blue chip dividend stocks:

  • Good blue chips have low debt
  • Blue chip investments should have industry prominence if not dominance
  • Good blue chip investments have the freedom to serve all shareholders

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High-quality dividend-paying stocks with growth potential can give your portfolio a boost

As with conservative dividend-paying stocks, dividend growth stocks offer investors a measure of security. Dividends, after all, are much more stable than earnings projections. More important, dividends are impossible to fake—either the company has the cash to pay them or it doesn’t.

However, it’s important to avoid judging a company based on the fact that it pays a dividend. Nor should you be tempted solely by a high dividend yield (the percentage you get when you divide a company’s current yearly payment by its share price).

That’s because a high yield can sometimes be a danger sign rather than a bargain. For example, a dividend stock’s yield could be high simply because its share price has dropped sharply (since you use a company’s share price to calculate yield). That drop may signal investor anticipation of coming bad news.

As well, you should always remember that while growth stocks hold the potential for greater gains than conservative selections, they typically expose you to a higher level of risk—even if they are dividend-paying stocks.

That’s why we look beyond dividend yield when making investment recommendations, and look for dividend stocks that have established a business and have at least some history of building revenue and cash flow.

Use our three-part Successful Investor approach to find high-quality dividend-paying stocks 

  • Hold mostly high-quality, dividend-paying stocks.
  • Spread your money out across most if not all of the five main economic sectors: Manufacturing & Industry, Resources & Commodities, Consumer, Finance, and Utilities.
  • Downplay or stay out of stocks in the broker/media limelight.

Bonus tip: You should know these 4 key stock dividend dates

  • The Declaration Date is several weeks in advance of a dividend payment—it’s when the company’s board of directors sets the amount and timing of the proposed payment.
  • The Payable Date is the date set by the board on which the dividend will actually be paid out to shareholders.
  • The Record Date is for shareholders who hold the stock before the payable date and receive the dividend payment. That date is set any number of weeks before the payable date.
  • The Ex-Dividend Date is two business days before the record date and it’s when the shares begin to trade without their dividend. 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. 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. 

What do you watch for in a dividend stock to determine whether or not it’s a good investment?


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