Investors looking for a successful dividend stock strategy need look no further. Here’s the advice you need.

Stocks with high dividend yield

Developing a profitable dividend stock strategy starts with these key tips—including looking for indicators of dividend sustainability

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. And 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.

Above all, for a true measure of stability within a dividend stock strategy, focus on stocks that have maintained or raised their dividends 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.


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How to find the top income stocks as part of a successful dividend stock strategy

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

An income stock usually has two distinct traits. The first is a high dividend yield. You can identify income stocks by their high dividend yields (the percentage you get when you divide a company’s current yearly payment by its share price). For example, stocks with a dividend yield higher than, say, 3% would typically be attractive to an income-seeking investor.

Meanwhile, though, investors should note that a very high dividend yield can also be a sign of future trouble (such as an imminent dividend cut).

Apart from a high dividend yield, you should look for a second trait: stocks that have a long history of paying (and raising) their dividends.

If you’re an income stock investor, you may wish to place more emphasis on 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. However, you’ll still want to make sure your portfolio is well-diversified across most if not all of the five sectors.

Watch for these characteristics as part of your dividend stock strategy

  • The best dividend stocks offer sustainable dividends: It’s important to watch out for unusually high dividend yields—the payouts may not be sustainable. Investors should avoid judging a company based solely on its dividend yield. That’s because a high yield can sometimes be a danger sign rather than a bargain.
  • The best dividend payers will include these financial factors: As a general rule, companies that make money regularly are safer than chronic or even occasional money losers. Furthermore, the more manageable the debt, the better. When bad times hit, debt-heavy companies often go broke first—especially ones that also keep trying to allocate part of their cash flow to paying dividends.
  • The best dividend stocks have hidden assets: Successful investors recognize that hidden assets are a great way to cut risk for conservative and aggressive investors, One great example is research and development.

Take a “buy, hold and watch carefully” approach as part of your ongoing dividend stock strategy

Some people think that buy-and-hold means buy and forget about it. It really should be buy, hold and watch carefully—even with a dividend-paying stock with a pedigree. But when you build your retirement portfolio out of stocks that pay dividends, you have fewer unpleasant surprises and a better, more stable source of retirement income, from steady dividends and occasional capital gains.

We’ve always placed a high value on a strong record of paying dividends, mainly because it provides that pedigree of sorts for the stocks we recommend. It takes a lot of success and high-quality management for a company to have the cash and the determination to declare and pay a dividend every year for five or 10 years or more. It’s not something you can create on the spur of the moment.

Now, many investors have come to share our high regard for dividends, especially as a source of retirement income. However, some take this reliance on dividend stocks 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.”

Use our three-part Successful Investor approach to guide your dividend stock strategy

  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.

Aside from dividends, what do you look for in a stock that suggests a stable, money-making company?

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