Dividend investing can be a great way to build wealth over time. Although they involve more risk than investing in, say, bonds, dividend stocks offer both income and the potential for longer-term capital appreciation.

Finding stocks with track records of solid annual dividend increases is the goal of every income-focused investor. Here you’ll find some background and tips to help you research the market to discover the “dividend aristocrats”. Towards the end, we also feature a list of historically strong dividend stocks in Canada and the U.S.

First things first, however, let’s quickly cover dividend stock fundamentals. You’ll also find a more detailed description of dividend stocks and how they compare to regular equities here.

Dividend stocks – the basics

Dividend growth investing is a specific strategy that involves investing in corporations that pay dividends – and, better still, increase their dividend payouts annually.

With traditional fixed-income investments such as T-bills and cash accounts offering lackluster returns, many investors have turned to dividend stocks in recent years. Dividend stocks typically offer yields in the range of 1.5 percent to 5 percent.

There are other advantages for income investors:

  • You could profit in two ways. The first way is if the share price rises; the second way is if you receive a dividend payment. If, for instance, the value of your shares increases by 5 percent and your dividend payments is 5 percent, you make a 10 percent profit (excluding taxes and so on).
  • You can benefit from a steady flow of income. With regular stocks, you don’t see a profit until you sell your shares. With dividend stocks, however, you’ll receive regular income payments while still holding onto to your shares for potential capital appreciation.
  • Protection against inflation. Dividend stocks have the potential to keep pace with inflation. As inflation pushes prices up, profits could also rise, enabling companies to raise dividend payments.
  • Strong dividend returns could be an indication of corporate strength. Companies that return cash to shareholders suggests that the business underlying the stock is solid.
  • Ideal for buy-and-hold investing strategies. Income investors tend to think long-term, and look for stocks that deliver dependable sources of income in good times and bad times.

With the ongoing COVID-19 pandemic, even recognized dividend stars have been impacted by the uncertainty. Keep monitoring dividend payments for the stocks in your portfolio, in addition to the stocks you’re considering in the future.

Finding dividend stocks that are right for you

Before investing in any dividend stock, you should practice due diligence to ensure it’s right for your needs. Most dividend investors focus on blue chip stocks with multi-billion dollar market capitalizations.

Evaluating your dividend stock choices

When researching stocks, experienced investors go beyond a company’s dividend policy. They look into key areas that could influence their decision-making.

  • A long history of rising dividend payments can be an indicator of a stable corporation. If possible, look back decades over their history of dividend payments. Additionally, you’ll want to know the dividend payout ratio, which determines the company’s total amount of dividends in relation to net income.
  • Fiscal strength of a company is often an important consideration when making any investment decision. Common metrics used, although not exhaustive, are the debt ratio and leverage ratios.
  • Cash flow that’s reliable and sustainable, rather than erratic, could speak well of a company’s stability and health. Sectors that have historically produced positive cash flow include, but not limited to, financial services, consumer goods and utilities.
  • Compare different companies’ price-to-equity (P/E) ratio with the P/E for their sector. (The P/E ratio is calculated by dividing stock price by earning per share.)
  • Check sector trends for new and emerging factors that could impact the company’s short-term and long-term ability to pay shareholders steadily rising dividends.

Dividend stocks within sectors

In North America, the following sectors tend to offer more dividend-paying stock options. You’ll find hundreds of possible stocks for your portfolio on major stock exchanges such as the TSX in Canada, and the NYSE and NASDAQ on Wall Street.

  • Energy including suppliers of natural gas and crude oil
  • Utilities such as electricity, water and natural gas producers
  • Consumer goods like food and beverages and household products
  • Real estate – commercial and residential, as well as real estate investment trusts (REITS)
  • Pharmaceuticals, including prescription drugs
  • Telecommunications

Researching dividend stocks - where to look for the insights you need

Fortunately, with just a little elbow grease, investors can find the information they need to buy dividend stocks with more confidence. Here are sources to consider as you’re researching.

Company annual reports, quarterly statements and balance sheets

You’ll find if the company is profitable and whether its profits are growing, steady or falling. The cash flow statement in particular will show you if the company has the means to cover liabilities and dividend payments to shareholders without issue.

Your brokerage’s research resources

Any brokerage dedicated to empowering their clients’ decision-making will offer an extensive range of analyst reports, research, education and other resources. Check out Scotia iTRADE’s Tools & Research offerings.

Dividend payment histories

Find the number of years that the company has paid dividends, how often dividend payments have risen, and so on. These facts may give you a sense of how serious a company takes dividend growth – and its shareholders. Companies typically include dividend payment history in the “Investor Relations” portion of their website.

A Dividend Reinvestment Plan, as known as a DRIP, enables account holders to automatically reinvest their dividend cash payments (on the dividend payment date) to buy additional shares in the same company. This benefits investors in two powerful ways: compounding interest and dollar-cost averaging.

Scotia iTRADE DRIPs charge no fees or commissions, so your earnings are your own. To open a DRIP account or determine if you’re eligible, call 1-888-872-3388 or sign into your account.