Finding the best stock to buy today will focus on shares with a history of dividend payments—and more

Are you looking for the best stock to buy today? One Successful Investor tip we share often is to invest in companies that have been paying a dividend for 5 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 as well.

Meanwhile, Canadian citizens who own shares in Canadian stocks that pay dividends will also benefit from a special tax break they may be eligible to receive.

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Looking for the best stock to buy today? More on stocks that have a strong history of paying dividends

Companies pay dividends to attract shareholders and reward them for owning stock in the corporation. It’s a long-established practice. Joint-stock companies were formed in Europe as early as the 1200s. The first to pay a dividend was the Dutch East India Company in the early 1600s. Not coincidentally, it also began trading its shares on the Amsterdam Stock Exchange, making it easier to attract more investors.

In recent decades, study after study has demonstrated the enduring power of dividends. Surveys of both the Toronto Stock Exchange and the S&P 500 show dividend-paying stocks outperforming their non-dividend-paying counterparts consistently over time, usually by considerable margins.

In fact, dividends have accounted for over 40% of the S&P 500’s total returns since 1929.

A 2013 Bloomberg survey also showed that the dividend yield on the S&P/TSX Composite Index over the previous decade was 60% higher than the yield on 10-year Government of Canada bonds. The Index’s average dividend yield was 3.2%, while the government bonds yielded just 2%.

What these figures really indicate is that dividend-paying stocks contribute a significant portion of the wealth you can expect to gain over the years. History tells us that investors who downplay or ignore dividends are depriving their portfolios of substantial earning power. 

Focus on dividend stocks—but “buy and watch carefully”

We’ve always placed a high value on a strong record of paying dividends, mainly because it provides something of a pedigree for 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 ten years or more. It’s not something you can create on the spur of the moment.

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 consider. It takes continuing effort to succeed as a so-called “buy-and-hold” investor. You need to learn how to “buy and watch carefully.”

The best stock to buy today could feature hidden assets

When researching the best 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 historical 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.

Use our three-part Successful Investor approach to uncover the best stock to buy today to add to your portfolio

Even the best dividend stocks can go through dividend droughts — periods when they have to cut or quit paying dividends due to setbacks within their company, their industry or the economy as a whole. The COVID-19 pandemic belongs to that last group.

That’s why you still need to observe our three key portfolio rules, even when confining your investments to stocks with strong dividend records. They are: 

• Invest mainly in well-established, dividend-paying companies.
• Spread your money out across most if not all of the five economic sectors (Manufacturing & Industry, Resources & Commodities, the Consumer sector, Finance and Utilities). This cuts your risk of getting too heavily invested in an industry or sector that is headed for a slump. It also increases your chances of investing in a super stock with returns that are two to five times higher or more than the market average.
• Downplay or avoid stocks that are in the broker/media limelight. This limelight inflates investor expectations. When stocks fail to live up to those inflated expectations, downturns can be brutal. 

Is there an industry you favour while seeking the best stock to buy today? 

How much of your portfolio consists of dividend stocks?