Psst … Discover the Benefits of Investing in Canadian Dividend Stocks

Canadian dividend stocks like Royal Bank of Canada (TSX:RY) often raise their payouts over time.

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Do you want to invest in Canadian dividend stocks?

If so, you couldn’t have picked a better time than now to get started.

This year has witnessed a major rally in growth stocks, leaving many dividend-paying stocks in the dust. Sectors like banking and energy are out of favour right now, resulting in some pretty high dividend yields. You can get 6% yields today on some of Canada’s biggest, most stable and reliable companies. In this article, I will explore the benefits of investing in Canadian dividend stocks in 2023.

Canadian dividend stocks are some of the most reliable in the world

One thing that Canadian dividend stocks have in spades is stability. Canada has many companies that have been paying dividends for over 100 years.

Take Royal Bank of Canada (TSX:RY) for example. A 150-year-old company, it hasn’t missed a single dividend payment in the last 100 years. Canada’s banking system in general is known for being very stable. Canadian regulators have big expectations of the country’s banks and hold them to very high standards. For example, regulators currently require that Canadian banks have 11% common equity tier-one ratios (high-quality capital divided by risk-weighted assets). The U.S. only requires 4.5%! So, Canadian banks are generally thought of as safer than their American counterparts.

At today’s prices, Royal Bank of Canada stock yields 4.06%. There are other Canadian banks with yields as high as 6%, but they haven’t performed as well as RY has. Over the years, Royal Bank of Canada has steadily grown its business and increased the dividends it has paid to shareholders. Now that it’s about to buy HSBC Canada from HSBC, it has the potential to grow its earnings even more.

Many dividend stocks raise their payouts over time

Another thing that many dividend stocks have going for them, apart from their stability, is their tendency to raise their payouts over time. The Canadian dividend stock Fortis (TSX:FTS) has raised its dividend every single year for 49 years running. If it raises its dividend again next year, it will acquire the status of “Dividend King” — a company that raises its dividend every year for 50 years straight.

Will Fortis be able to pull it off?

Most likely, yes. As a regulated utility, Fortis has very stable revenue that comes in year in and year out, with clients locked into long-term contracts tied to their homes. Most utilities enjoy relatively stable revenue, but Fortis’s revenue is more stable than even other utilities. It actually grew its earnings slightly in 2008 and 2020, the two most notable recent recessions on record. Management is aiming for a 6% dividend hike next year, if it achieves one, then Fortis will become a true Dividend King.

One risk to be aware of

One risk to be aware of with dividend stocks is the possibility of the dividend being cut. This happened last year when Algonquin Power & Utilities posted a steep decline in earnings brought on by high interest rates. When dividend stocks cut their dividends, then shareholders receive less dividend income than they thought they’d get. They also tend to see their shares go down in value. So, dividend cuts are a serious risk to be aware of with dividend stocks.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

HSBC Holdings is an advertising partner of The Ascent, a Motley Fool company. Fool contributor Andrew Button has no position in any of the stocks mentioned. The Motley Fool recommends Fortis. The Motley Fool has a disclosure policy.

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