When you start building a portfolio for your retirement, one main consideration should be given to stocks that pay regular dividends. Such stocks are generally the safest investments for your nest egg and have the potential to pay you the rest of your life in the form of increasing payouts.
Companies that offer regular dividend increases run mature and stable businesses that allow them to generate strong cash flows. Second, rewarding investors on a sustained basis means that their top executives care about their reputation and want loyal investors.
Regular hikes in dividends also tell us about a company’s ability to predict its future. It would look very unprofessional and damaging for a management to hike dividends only to cut them after a couple of quarters.
To better understand this investing style, let’s take the example of some of the top dividend paying stocks. Here are my two favorites from Canada.
Toronto-Dominion Bank (TSX:TD)(NYSE:TD) has an excellent payout policy, distributing between 40-50% of its income in dividends each year. What’s helping TD to steadily increase its dividends is the company’s diversified business model and its wide presence in the U.S.
After a 10.4% increase in its payout in February, income investors in TD stock now earn a $0.74-a-share quarterly dividend, which translates into a 3.9% yield on yearly basis.
The bank is forecast to grow its dividend payout between 7% and 10% each year going forward — an impressive growth rate at a time when the 10-year government note is yielding less than 2%.
During the past five years, TD’s dividend has grown about 10% per year, suggesting that the bank has strong cash flows to support its dividend policy. With the dividend payout ratio hovering around 50%, the bank is in a comfortable position to maintain that growth.
Similar to banks, telecom utilities also offer a good potential to earn dividend growth. In Canada, BCE Inc. (TSX:BCE)(NYSE:BCE) is one such stock that’s been rewarding its investors for decades. The company runs Canada’s largest telecom network with an expanding wireless division.
BCE has long maintained a policy of increasing its dividend by 5% annually and has used a series of acquisitions to partly fuel the cash flow growth necessary to keep boosting the payout.
BCE generally distributes between 65% and 75% of its free cash flow in payouts. In line with this policy, BCE has increased its annual payout by 107% since the fourth quarter of 2008; the payout is now at $3.17 per share.
Dividend growth stocks, such as TD Bank and BCE, are your best bets to earn uninterrupted cash streams in the form of passive income. All you have to do is to buy stocks of mature and stable companies with a long history of rewarding investors and remain invested.
When you buy heavily cyclical stocks at low prices… and then hold the shares until the cycle reaches its peak… you can make a very healthy profit.
Every investor knows that. But many struggle to identify the best opportunities.
Except The Motley Fool may have a plan to solve that problem! Our in-house analyst team has poured thousands of hours into their proprietary research – and this is the result.
Our top advisor Iain Butler has just identified his #1 stock to buy in 2019 (and beyond).
Fool contributor Haris Anwar doesn't own the shares mentioned in this article.