Many investors think that dividend stocks are only for stodgy portfolios or retirees. Whether you are a newbie or are on the brink of retiring, you get quarterly or annual income from stocks that pay dividends. You can also benefit from the potential for capital gains. In short, high-yielding dividend stocks can give your portfolio both income and growth. Cash is not a bad thing, especially when there are so many risks affecting the stock market. Let’s go over some advantages to purchasing dividend stocks, and at the end of the article we will highlight some of the best Canadian dividend stocks for 2017.
Two different views on dividend paying stocks
Dividend junkies believe that high yielding stocks tend to outperform no yield or low yield stocks over time. Professor Jeremy Siegel of The Wharton School of Business is a staunch advocate of dividend investing. He argues that higher dividend yields allow shareholders to accumulate many more shares (by reinvesting dividends), causing returns to snowball. “Dividends matter a lot,” Siegel writes. “Reinvesting dividends is the critical factor giving the edge to most winning stocks in the long run”.
Focusing only on dividends may cause you to miss diamonds in the rough
On the other hand, dividend mythbusters believe that by focusing only on dividend yield, (the amount of money each share pays you expressed as a percentage per year), that you will overlook high-growth stocks that are in the early stages of expansion. Such companies try to use earnings to fuel fast growth and are not at a stage to return cash to their investors.
All of us as investors like to boast that we were smart enough to spot rising stars like yoga-inspired retailer Lululemon (LLL.TO) that managed to double in price in one year. Lululemon no longer trades on the TSX, but it had richly rewarded investors who got in early.
Yet how many of these trailblazers are we lucky enough to include in our portfolio? Further, in the rush to find high-growth stocks, be aware of the “Growth Trap”. This is the tendency for investors to pay too much for high-growth stocks because they expect too much growth. Be aware of their current price to earnings ratio. If it is too high, it’s probably too good to be true.
Dividend Investing Concepts to Mull Over
As you are figuring out what to do for your portfolio, here are a couple of concepts to think about.
- The bird-in-hand theory advanced by Gordon and Lintner. It states that investors prefer the certainty of dividends to the potential of capital gains.
- Dividend income from Canadian stocks is eligible for a nice tax credit for Canadian tax payers.
- Reinvesting your dividends is akin to dollar cost averaging. You are buying more shares with your high yields and these act as a protection during bear markets. In turn, the extra shares accelerate in value when markets turn bullish again. Jeremy Siegel terms dividend reinvesting the “bear-market protector and return accelerator”.
Special Situation Dividend Stocks
Here are 2 special situations that catalyze stock prices:
- A company that is about to increase its dividend because that move signals management’s confidence about the future.
- A company that is about to initiate a payout. To some investors this suggests that future growth prospects are not going to be nearly as exciting, but bear in mind, that once a company initiates a dividend, there is a whole new investor base that will create pent-up demand for these shares. Income focused funds and indexes, for example, cannot invest in a stock until it has paid a dividend.
Building a Dividend Stock Portfolio
Diversification is key, and there are conflicting views on how many stocks make a solidly diversified portfolio. Numbers range from 15-60. It may be hard for the average investor to keep track of that many stocks, let alone conduct reasonable research. That’s the reason why dividend ETFs – those that target stocks that have a solid history of paying or increasing dividends – are appealing.
In Canada, high dividend stocks are focused in financials and energy, with a few consumer or industrial names. With a collection of reasonably diversified names, you can build a portfolio that yields in excess of 3%. Here are some of the best Canadian dividend stocks in 2017.
||Price as of June 23rd 2017 $
||Dividend yield %
|Bank Of Montreal
|Sun Life Financial
|Trans Canada Corp
|Royal Bank Of Canada
|Enbridge Income Fund
This is by no means a comprehensive list, nor should it be viewed as buy or sell recommendations. It is just a list to get you started on thinking about dividend investing. This list was taken from a Stocktrades article on the best Canadian dividend stocks for 2017. Also keep in mind that this is a very basic introduction to dividend investing, if you have any questions, and before making any decisions you should talk to your financial advisor.