Dividend stocks can be excellent to hold in your portfolio for a couple of reasons. First, these stocks tend to be a lot more stable than growth stocks. That’s because companies that distribute dividends tend to be already very established and, thus, don’t tend to see lots of volatility in their value. Second, as the term suggests, these companies pay shareholders a dividend. That means shareholders are paid on a recurring basis simply for holding shares in the company.
In this article, I’ll discuss three things that investors should consider when buying dividend stocks. In my opinion, these three factors could help you identify key companies that could help you achieve financial independence.
Look for companies with a history of increasing dividend distributions
When I look for dividend stocks to hold in a portfolio, I first consider whether it has a long history of raising its dividend. This is important because a company that fails to raise its dividend over time will result in less buying power for investors. That happens because of inflation. Therefore, in my opinion, it’s imperative that you hold shares of companies that can increase their distribution each year by 2% or more.
Fortis (TSX:FTS) is a tremendous company to consider. This stock has been increasing its dividend distribution in each of the past 50 years. In addition, the company has already announced its plans to continue raising its dividend through to 2028 at a rate of 4% to 6%. That would help investors stay very much ahead of inflation over that period.
Dividend stocks should have a long history of paying shareholders
Now, there are some excellent companies out there that manage to raise their dividend sometimes, but not every year. In my opinion, if a company can show a really long history of paying its shareholders, then I’d be inclined to give it a shot in my portfolio.
Bank of Nova Scotia (TSX:BNS) is a great example of such a company. This banking company hasn’t been able to increase its dividend every year; as such, it’s not listed among the most elite Canadian Dividend Aristocrats. However, Bank of Nova Scotia has managed to pay shareholders a dividend each year since 1833. That represents 190 years of continued dividend payments and something that you shouldn’t brush aside.
Don’t ignore a company’s payout ratio
Finally, investors should consider a company’s payout ratio. This is crucial because it suggests whether a company will be able to continue raising its dividend or even paying a dividend at all. Take a stock with a 60% payout ratio, for example. If the economy takes a turn for the worse and its earnings aren’t as strong in one year, then it’s very likely that investors could see a cut or cancellation of that stock’s dividend. However, a stock with a 30% payout ratio could have lots more room to continue its dividend during those times.
Alimentation Couche-Tard (TSX:ATD) is an example of a stock with a low payout ratio (13.3%). At a ratio that low, if the Canadian economy were to ever take a massive hit, then I would be very comfortable thinking its dividend is safe. This dividend-payout ratio is even more impressive if you consider that Alimentation Couche-Tard has raised its distribution at a compound annual growth rate of about 27% over the past 10 years.
