Successfully investing to get dividends starts with these key tips

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Investing to get dividends is a strategy that many savvy investors focus on so they can increase their portfolio gains with less risk

Top-quality stocks tend to lose less of their value in the kind of severe market setback we’re experiencing today. They also tend to bounce back nicely when conditions improve. These are the kinds of stocks we continue to recommend in our newsletters and other services.

To build a portfolio of those stocks—and to show the best long-term results, Pat McKeough still thinks you should stick with his three-part program:

  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.

Meanwhile, investing to get dividends from stocks with track records of sustainable dividend payments gives you a strong measure of reliability. And when you include the potential for tax-advantaged capital gains as well as dividend income, Canadian dividend stocks are an attractive way to boost your overall portfolio returns.


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Focus on investing to get dividends for long-term growth and security

We think successful investors will profit from focusing on buying and holding companies that have maintained or raised their dividends during both economic and stock market downturns. These firms have proven themselves able to handle periods of earnings volatility. By continually rewarding investors, and retaining enough cash to finance their businesses, they provide an attractive mix of safety, income and growth.

Dividends from these companies will be 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. As you get older and closer to retirement, you should consider raising the proportion of dividend-paying stocks in your portfolio, to cut risk and improve the stability of your investment results.

Recognize the characteristics of top dividend-paying stocks to get more from your portfolio

The top dividend-paying stocks to invest in have strong positions in healthy industries. They also rely on strong management to make the right moves to keep them competitive in changing marketplaces.

The top dividend-paying stocks also have most if not all of the following characteristics:

  • They provide regular income
  • They are one of the prominent if not dominant firms in an industry
  • They feature hidden assets
  • They are on high-quality, proven companies
  • They operate a well-established business
  • They have strong management
  • They have manageable debt

If you are investing to get dividends as a Canadian resident, you get the bonus of a tax credit

Canadian taxpayers who hold Canadian dividend stocks get an additional bonus. Their dividends can be 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 29% on dividends, compared to 50% on interest income). Investors in the highest tax bracket pay tax on capital gains at a rate of 25%.

All in all, it’s still safe to assume that dividends will supply perhaps a third of the market’s total return over the next few decades. That’s a major tax-deferral opportunity, even though taxes on dividends are already lower than on interest.

Look for a reasonable dividend payout ratio when successfully investing to get 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 or cash flow are allotted to paying dividends.

If a company keeps its payout ratio fairly steady, and its earnings grow, the amount you receive in dividends should also grow. However, if a company must keep paying out a larger and larger percentage of its earnings just to maintain the dividend, it is reasonable to wonder whether the company is in decline and the dividend is in danger of being cut.

You need to look at other factors, as well, of course if the dividend payout spikes. The company may be going through a low cycle in its industry, or have a temporary problem it has a good chance of solving.

Bonus tip: Avoid conflicts of interest when investing

Conflicts of interest have a big impact on what people believe, recommend, say and do. This is especially true if there’s money involved.

To succeed as an investor, it’s essential to stay alert for conflicts of interest. Failing to do so can devastate your long-term investment returns. Failing to observe this rule is undoubtedly the single costliest mistake that most investors ever make. It’s particularly dangerous when you are just starting out as an investor, or going back in the market after a long absence.

High dividend yields can be misleading. How do you ensure that the dividend stocks you buy are from a company committed to investing in its growth?

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