How to spot the best Canadian dividend stocks

best canadian dividend stocks

Top-quality Canadian dividend stocks offer investors a unique blend of long-term cash flow and tax benefits.

At TSI Network we think Canadian dividend stocks are some of the best investments you can own.

Dividends rarely get the respect they deserve, especially from beginning investors. That’s because a dividend paying stock’s yearly 2% or 3% or 5% yield barely seems worth mentioning alongside yearly capital gains of 10%, 20% or 30% or more.

But dividends are far more reliable than capital gains. A stock that pays a dividend of $1 this year will probably do the same next year. It may even raise it to $1.05.

The best Canadian dividend stocks respond to tough economic times by doing their best to maintain, or even increase, their payouts. As well, dividends are impossible to fake – either the company has the cash to pay dividends or it doesn’t.


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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Why Canadian dividend stocks?

So why do we recommend Canadian dividends stocks? Canadian taxpayers who hold Canadian dividend stocks are eligible for the dividend tax credit in Canada. 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 23% on dividends, compared to 50% on interest income—investors in the higher tax bracket pay tax on capital gains at a rate of 25%.)

What are dividends?

Dividends are cash payouts that serve as a way companies share the wealth they’ve accumulated through operating the company. 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 monthly as well. In fact, dividends can produce as much as a third of your total return over long periods.

Picking the best Canadian dividend stocksWatch out for unusually high dividend yields

Investors should avoid judging a company based solely on its 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 paying stock’s yield could be high simply because its share price has dropped sharply (because you use a company’s share price to calculate yield) in anticipation of a dividend cut.

That’s why we recommend that you look beyond dividend yield when making investment decisions, and look for companies that also have established a sound business and have a history of building revenue and cash flow.

Some economic sectors are more volatile than others

Speaking very generally, stocks in the Resources sector and the Manufacturing sector are apt to expose you to above-average volatility, while those in the Canadian Finance and Utilities sectors involve below-average volatility. Shares of many finance-sector firms have been unusually volatile in the past few years, because their industry is changing and expanding. However, profits of companies in Canadian Finance and Utilities tend to be more stable than profits in Resources or Manufacturing companies.

Consumer sector stocks are apt to fall in the middle, between the more volatile Resources and Manufacturing companies and more stable Finance and Utilities companies.

A history of paying a dividend

One of the best ways of picking a quality Canadian dividend stock is to look for companies that have been paying dividends for at least 5 to 10 years. Companies can trump up quarterly earnings, issue press releases to appear to be making strong progress, but they cannot fake dividends. Dividends are cash outlays that an unsuccessful company could never produce.

Seek out Canadian dividend stocks with hidden assets

When researching Canadian 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 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.

Invest in Canadian dividend stocks that dominate their market

In your research we recommend looking for Canadian dividend stocks that have industry prominence, if not dominance. Our reasoning, besides brand recognition, is that major companies can influence legislation, industry trends, etc. to suit themselves. Minor firms can’t do that.

Are you a Canadian taxpayer that has invested in Canadian dividend paying stocks? Have you taken advantage of the Canadian dividend tax credit? How you do you pick quality dividend paying stocks? Share your experience with us in the comments.

 

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