The Safest Dividend Stocks are Among the Best Ways to Boost Your Long-term Portfolio Returns

The safest dividend stocks consistently provide the “cash payouts” that strong companies give back to their shareholders. They are a major part of the Successful Investor approach to making money in the stock market.

The dividend yield for a stock is calculated as the total annual dividends paid per share, divided by the current stock price. Movements in the stock price will change the dividend yield. A rising stock price will push down the dividend yield and a falling stock price will push it up.


When to trust your dividends

“One of the best ways to judge whether a company will keep paying its dividend, or even increase it, is the dividend payout ratio. This simply measures what portion of a company’s earnings are allotted to paying dividends. If a company keeps its payout ratio fairly steady, say at 7% of earnings, and its earnings grow…”
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The safest dividend stocks lead to cash payouts that serve as a way for companies to share the profits they’ve accumulated through their operations. These payouts are drawn from earnings and cash flow and are paid to the shareholders of the company.

A dividend can produce as much as a quarter or more of your total return over long periods and are a key part of our Successful Investor approach. Below we discuss important information on dividends, including how to invest in dividend-paying stocks without taking on too much risk.

The safest dividend stocks are market leaders

The safest dividend stocks that we recommend as part of our Successful Investor approach have strong positions in healthy industries. They also incorporate strong management that makes the right moves to remain competitive in a changing marketplace. Dividends in general are a sign of investment quality. Some good companies reinvest profit to spur growth instead of paying dividends. But fraudulent and failing companies are hardly ever dividend-paying stocks. So if you only buy stocks that pay dividends, you’ll automatically stay out of almost all the market’s worst stocks.

Six tips investors can use to pick the safest dividend stocks

  • High quality stocks + high quality dividends = a winning combo
  • Look for a history of paying a dividend
  • Look for companies that raise their dividends
  • The best dividend stocks feature hidden assets
  • Watch out for stocks with an unusually high dividend yield

Canadian dividend stocks come with extra benefits

Canadian taxpayers who hold Canadian dividend stocks get a special bonus. Their dividends are eligible for the dividend tax credit in Canada. This dividend tax credit—available on dividends paid on Canadian stocks held outside of an RRSP, RRIF or TFSA—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—investors in the higher tax bracket pay tax on capital gains at a rate of approximately 25%.)

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.

You should also keep these important points in mind:

  • Canadian dividends can grow.
  • Look for Canadian dividend stocks with consistent dividend payments.
  • Canadian dividend stocks can have hidden assets.
  • The best Canadian dividend stocks dominate an industry.

The safest dividend stocks can weather downturns

For a true measure of stability, focus on those companies that have maintained or raised their dividends during an economic or stock-market downturn. 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.

Bonus Tip: Key dates related to the payment of dividends

The 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.

The payable date: The payable date is the date set by the board on which the dividend will actually be paid out to shareholders.

The record date: Only shareholders who hold the shares before the payable date will receive the dividend payment. That date is known as the record date, and is set any number of weeks before the payable date.

What is your favourite benefit from dividend stocks? The tax break? The low risk?

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