When it comes to finding the best dividend stocks to buy, one of the easiest and most common mistakes that investors often make is focusing too much on yield.
While a high yield can initially grab your attention because of how compelling it seems on the surface, it doesn’t tell you much about the quality of the business or how sustainable that dividend really is.
That’s why focusing too much on yield is risky. Because in many cases, the stocks offering the highest yields are doing so for a reason, and that reason is often weaker fundamentals, slower growth, or a higher risk of a dividend cut.
That’s why what makes a dividend stock impressive is not just about how much income they generate today, but it’s about how reliable that income is, how it grows over time, and what kind of business is supporting it.
Because there isn’t just one type of great dividend stock. There are plenty of different ways to generate income.
And when you understand that and focus on finding the best businesses possible, it becomes a lot easier to build a portfolio that actually works over the long haul.
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The different types of dividend stocks that actually work
One of the easiest ways to think about dividend investing is to break it down into the different roles each stock plays in your portfolio.
For example, there are dividend stocks that you buy primarily for stability, some are there for growth and others are there to maximize income.
So, when you build a portfolio that combines all three, you’re creating an income-generating portfolio that’s actually sustainable.
And because stability is what you want out of your core portfolio stocks, it’s not uncommon to see Fortis (TSX:FTS) listed as one of the most impressive dividend stocks in Canada.
Fortis isn’t a stock that’s going to offer the highest yield or the most growth. But that’s not the point of buying Fortis. Fortis is an impressive dividend stock because of its reliability and consistency.
As a regulated utility, it generates predictable cash flow and operates in an industry where demand is incredibly stable. That’s what’s allowed it to increase its dividend for more than 50 consecutive years.
And while the yield is currently 5%, the reliability and steady growth are what make it such an impressive core stock for your portfolio.
In addition to Fortis, another impressive dividend stock to consider is Brookfield Infrastructure Partners (TSX:BIP.UN), which is still an ultra-reliable dividend stock, but it offers a higher yield and ass more long-term growth potential to your portfolio.
By owning essential infrastructure assets around the world, it generates consistently growing cash flow largely through long-term contracts and regulated frameworks.
That gives it both stability and upside and is what’s allowed it to consistently grow its distribution while also delivering strong total returns over time.
In fact, management targets annual distribution increases of 5% to 9% and long-term annual returns of 12% to 15%, showing why it’s one of the most impressive dividend stocks to buy and hold long term.
A high-yield pick that still makes sense
Finally, if you’re looking to significantly boost the income your portfolio generates, Alaris Equity Partners (TSX:AD.UN) is a high-yield dividend stock that’s made for income investors.
Unlike traditional companies that operate a single core business, Alaris provides capital to private companies and takes a percentage of their cash flow in return.
That’s what allows it to pay such a high yield. It generates cash flow from a diversified portfolio of partner businesses, and on top of that, it maintains a relatively conservative payout ratio, consistently coming in below its target of just 65% to 70% of its distributable cash flow.
So, while the yield is roughly 6.6% today, it’s not just sustainable; it’s also consistently growing.
The Foolish takeaway
At the end of the day, dividend investing isn’t just about finding a few high-quality stocks; it’s about building a balanced portfolio that combines different types of income.
And that’s the key. Because when you combine different types of dividend stocks, you’re not just maximizing income today, you’re building a portfolio that can continue to generate and grow that income over time.
