If you have a Tax-Free Savings Account (TFSA), you should strongly consider filling it with dividend stocks. These companies generate more cash than they need to keep for reinvestment. They can therefore redistribute the money directly to shareholders.
Without a TFSA, you’ll likely be taxed at double-digit rates on dividends. Ouch. But if you hold these investments in a TFSA, you’ll accrue payments completely tax free. You can then withdraw the cash tax free or use it to buy even more stock. The choice is yours.
When it comes to dividends, bigger isn’t always better. Many so-called high-yield stocks can’t sustain their payout for more than a few years. What good is an income stream if it’s slashed soon after you buy?
When dividend shopping, find companies that can give you outsized dividends without sacrificing long-term sustainability. One of the best ways to do this is by analyzing a company’s distribution history.
If a stock has been paying out the same dividend for decades, it’s likely figured out a balanced formula for dividends and reinvestment.
The following picks each have dividends above 7%, but also a strong history to back up their sustainability.
A hidden gem
Chemtrade Logistics (TSX: CHE.UN) is one of Canada’s top dividend stocks, even if few investors are aware of it. With a $1 billion market cap, the company is simply too small for most analysts. That allows its 10.8% annual dividend to fall through the cracks.
Before you say that the payout is unsustainable, know that Chemtrade has been paying the same dividend for more than 13 years. It didn’t even cut the payout during the financial crisis of 2008 and 2009.
Chemtrade makes its money by distributing specialty industrial chemicals. When it comes to distribution, scale is king. It allows Chemtrade to buy inputs and deliver them to customers cheaper than the competition.
These inputs are pure commodities, so whichever company can offer the lowest price wins. With a structural scale advantage, Chemtrade has been winning that battle for decades.
Capitalize quickly
Rogers Sugar Inc (TSX: RSI) stock just saw its dividend yield hit 7.8%. This bargain may not last long.
Historically, Rogers Sugar was set up as a pure income-producing vehicle, redirecting profits from its sugar plantations to shareholders. In recent years, it’s expanded into value-add products like maple sugar to support long-term growth and diversify profits.
This winter, severe weather caused a crop failure, which will cause a huge blow to the financials over the next few quarters. In response, shares dipped from $6 to $5.
Notably, this year’s crop failure won’t be a long-term issue. The market has properly reacted to a short-term headwind, but over the long term, the company’s prospects are fully intact.
If you can keep a multi-year time horizon, you can scoop up shares and lock-in an abnormally high dividend yield.
