The Growing Power of Dividends
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Topic: Dividend Stocks
7 suggestions on how to tell if a stock pays a dividend, and if it will continue to do so
We believe investors will profit most, and do so with the least risk, by buying shares of well-established, dividend-paying stocks with strong business prospects. That then raises the question, how to tell if a stock pays a dividend?
The best companies to invest in for dividends have strong positions in healthy industries. They also incorporate strong management that makes the right moves to remain competitive in changing marketplaces.
Learn everything you need to know in '7 Winning Strategies for Dividend Investors' for FREE from The Successful Investor. The Best Canadian Dividend Stocks to Buy: REITS Canada and other Top Canadian Dividend Stocks.The Growing Power of Dividends
How to tell if a stock pays a sustainable dividend: These types of stocks give investors an additional measure of safety in today’s volatile markets. And the best ones offer an attractive combination of moderate p/e’s (the ratio of a stock’s price to its per-share earnings), steady or rising dividend yields (annual dividend divided by the share price), and promising growth prospects.
Today we’re going to look at how to tell if a stock pays a dividend and—more important—if it’s likely to keep paying it. You’ll want to recognize these stocks when they are available.
But first, let’s quickly recap the value of dividends and dividend-paying stocks by looking at some reasons for investing in them.
- Growth and income. The best dividend-paying stocks offer both capital-gains growth potential and regular income from dividend payments.
- Dividends can grow. Stock prices rise and fall, so capital losses can follow capital gains, at least temporarily. Interest on a bond or GIC holds steady, at best. But top-quality 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 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.
For a true measure of stability, focus on those companies that have maintained or raised their dividends during a recession 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. - Dividend income gets favourable tax treatment. Taxpayers who hold Canadian dividend-paying stocks get an additional bonus. Their dividends 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 about 25% on dividends, compared to about 54% on interest income). Investors in the highest tax bracket will now pay tax on capital gains at a rate of roughly 27%.
7 suggestions on how to tell if a stock will keep paying its dividend
- How to tell if a stock pays a dividend? Look for companies with long-term success. These companies are the most likely to keep paying and increasing their dividends.
- The current financial health of a company. If a company is doing well, has done so consistently, and shows signs of growth, these factors are indicative of stocks that will keep paying a dividend.
- A company’s current dividend. If a company currently offers a healthy dividend, this is a good sign of its potential to continue offering a steady dividend.
- How does the company manage its relationships with investors? If there is a favourable relationship, and the company fits the other qualifications listed above, it may be a good dividend-paying stock to invest in.
- Note the competition. Look for companies with a strong hold on a growing market and a unique product or service that cuts its competition.
- Download my free report Dividend Paying Stocks: How High Dividend Stocks Can Supercharge Your Income Investing. This free report will teach you how to build strength into your portfolio by investing in the best high-quality dividend stocks.
- Subscribe to TSI Network’s Canadian Wealth Advisor Newsletter. We offer recommendations in this newsletter on dividend-paying stocks worthy of your investment. When a dividend-paying stock grabs our attention, we write about it here.
The seven tips shared above will help you determine if a stock pays a dividend and will keep paying.
How to tell if a stock pays a dividend–more importantly, a sustained dividend? What factors have you looked at in order to make that determination?
This article was originally published in 2015 and is regularly updated.
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