Finding top dividend-paying companies to invest in is easier when you follow these guidelines

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.

Below we look at the characteristics of the top dividend-paying companies, as well as reasons for investing in these companies.

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Investing in top dividend-paying companies will generate a big part of your long-term returns

It’s realistic to assume dividends from the top companies you hold will continue to contribute around a third of your total return. There’s more:

Dividends can grow. Stock prices rise and fall. Interest on bonds holds steady at best. But dividend-paying stocks like to ratchet their dividends upward—hold them steady in a bad year, raise them in a good one. That gives you a hedge against inflation.

Dividends are a sign of investment quality. Some good companies reinvest profit 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.

For a true measure of stability, focus on those companies that have maintained or raised their dividends during economic and 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 provide an attractive mix of safety, income and growth.

Four ways to find stocks that not only pay high dividends but will keep paying them

• Look for companies with a long-term record of success.
• Examine the current financial health of the company.
• If a company currently offers a steady dividend, this is a good sign of its potential to continue.
• Look for companies with a strong hold on a growing market and a unique product or service that cuts its competition.

The top dividend-paying companies in Canada offer big tax advantages

Canadian dividends have tax advantages if you’re a Canadian resident.

You’ll still pay tax on dividends in the year you get them (unless they’re sheltered in a registered savings account like an RRSP). But you’ll receive favourable tax treatment in Canada for dividends on Canadian companies because of the dividend tax credit.

This is why stocks with a history of raising their dividends are of great interest to investors looking to get the most from their investments. Canadian dividends qualify for the dividend tax credit, unlike bond-interest payments, which are taxed as regular income. That means dividend income will be taxed at a lower rate than the same amount of interest income.

Look at specific sectors to find top dividend-paying companies for your portfolio

Some of the best dividend-paying stocks are Utilities and Canadian Finance shares.

If you’re an income investor, you may wish to place more emphasis on those stocks. 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 all of the sectors.

By diversifying across most if not all of the five sectors, you avoid overloading yourself with stocks that are about to slump simply because of industry conditions or investor fashion.

Use our three-part Successful Investor approach to buy stocks, including the top dividend-paying companies

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.

Which sector do you look to for your best dividend-paying stocks?