Dividend stocks are excellent to hold in an investment portfolio because of the passive income you could generate. Fortunately, the Canadian stock market offers investors a plethora of outstanding dividend stocks. However, even with that many excellent options, it’s important that investors be prudent and choose the best stocks to hold in their portfolio.
In this article, I’ll discuss three characteristics that investors should keep in mind when choosing dividend stocks.
Look for stocks with a long history of paying dividends
When looking for dividend stocks to add to your portfolio, it’s important to know how long a company’s been paying its investors a dividend. Companies with longer histories of dividend distributions should be preferred over other companies. The reason for that being that those companies have proven that they prioritize maintaining a stable dividend.
In the Canadian banking industry, investors can find many companies that have been paying shareholders a portion of their earnings for more than a century. Bank of Nova Scotia (TSX:BNS) in particular has been paying its shareholders a dividend since July 1, 1833. Since then, it has never missed a dividend payment. That represents nearly 190 years of continued dividend distributions.
Some companies are great at increasing their distributions over time
In addition to a long history of distributing dividends, some companies are known for increasing their dividend rate over time. This is important because a stagnant dividend could cause investors to lose buying power over time due to inflation. In my opinion, investors should look for stocks that raise dividends by 5% on an annual basis.
Canadian National Railway (TSX:CNR) is an example of a company that has done an excellent job of raising its dividend over time. This stock first started distributing a dividend to shareholders in 1996. At that time, investors were paid a dividend of $0.016667 per share. Canadian National’s most recent dividend was $0.79 per share. That represents a compound annual growth rate of nearly 16% over the past 26 years, helping investors stay much ahead of inflation.
Keep in mind a company’s payout ratio
Finally, investors should take note of a company’s payout ratio. Simply put, this is the ratio between a company’s dividend and its earnings. A lower payout ratio should be preferred, as it suggests that a company’s dividend is more secure should it experience a slowdown in earnings or revenue. Generally, I look for stocks that maintain a payout ratio of 30% or lower.
Alimentation Couche-Tard (TSX:ATD) is an example of a company that maintains an exceptional payout ratio. This stock has raised its dividend in each of the past 11 years. However, despite those raises, Alimentation Couche-Tard’s payout ratio is still only 12.7%. That makes me very confident that Alimentation Couche-Tard could continue to offer investors a reliable dividend for many years to come. This stock deserves consideration for your dividend portfolio today.
