When it comes to dividend investing, one of the biggest mistakes investors consistently make is focusing too much on the current yield the stock offers.
That’s understandable because on the surface, it’s easy to think that the higher the yield, the better the investment.
But in many cases, unless the dividend is extremely high, the yield actually tells you very little about the quality of a business.
So, although some of the highest-yielding stocks can actually be the riskiest, especially if that dividend isn’t sustainable, when you’re trying to figure out what actually makes a “good” dividend stock, there are more important factors to consider.
Because investing in dividend stocks is not just about how much income you’re getting today, it’s about how reliable that income is, whether it can continue to grow over time, and how quickly it can grow over time.
That’s why some of the best dividend stocks are usually some of the least exciting businesses, and often some of the most predictable.
That’s why if you’re looking for high-quality, reliable dividend payers, infrastructure stocks are some of the best. These are businesses that operate essential assets like pipelines, utilities, and rail networks, which the economy depends on every single day.
Furthermore, not only do they provide essential services, but they also generate steady cash flow, have massive barriers to entry, and in many cases, can even increase their revenue alongside inflation.
And when you combine that with disciplined payout ratios and consistent long-term growth, that’s what really makes a dividend stock “good.”
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A high-yield infrastructure stock built for reliable dividend income
If you’re looking for a reliable dividend stock to buy and hold for years with confidence, one of the best examples in Canada is Enbridge (TSX: ENB).
Enbridge is a massive $164 billion company that operates one of the largest energy infrastructure networks in North America, transporting oil and natural gas across the continent.
And what makes that business so valuable is that it acts more like a toll road than a traditional energy company, getting paid for moving energy instead of producing it.
That means its cash flow is largely supported by long-term contracts, which makes it much more predictable than companies that are directly exposed to commodity prices.
On top of that, Enbridge is consistently retaining capital to expand its business over time, including increasing its exposure to utility-like operations, which further stabilizes its earnings. Furthermore, those consistent investments in growth are also what support Enbridge’s attractive dividend and consistent dividend growth.
So not only does it offer a sustainable dividend with a current yield of 5.2%, but it’s also increased its dividend every year for three straight decades.
That means every year you hold the stock, Enbridge pays you more. It also shows the resiliency of Enbridge’s business, having the ability to not only pay, but increase the dividend through many different financial environments, market pullbacks and recessions over the last 30 years.
So, while the yield is attractive, it’s the combination of reliable cash flow and disciplined management that really makes Enbridge one of the best dividend stocks in Canada.
A lower-yield stock with strong long-term growth potential
While Enbridge is a great option for investors looking for higher income today, Canadian National Railway (TSX: CNR) is a perfect example of why a lower yield can still be just as attractive over the long term.
Canadian National operates a massive rail network that connects key regions across North America, moving everything from commodities to consumer goods.
And like other infrastructure businesses, it benefits from a huge competitive advantage, because building a competing rail network would be incredibly expensive and nearly impossible from a regulatory standpoint.
That gives the company strong pricing power and allows it to generate consistent earnings over time. And that consistency is what drives its dividend.
So, while the yield is lower, currently sitting at roughly 2.4%, the company also has a long history of increasing its dividend, and retains even more capital than Enbridge, which helps create significant long-term growth potential and supports continued dividend increases for years to come.
So, at the end of the day, if you’re looking for a good dividend stock, it isn’t just about how much income you’re getting today; it’s also about how reliable that dividend is and how much it can increase over time.
