Are Dividend Stocks Right For You? (Plus The Best Dividend Stocks To Buy Right Now)

Are Dividend Stocks Right For You? (Plus The Best Dividend Stocks To Buy Right Now)
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Dividend Stocks  by John Szramiak was originally published on Vintage Value Investing

Many investors think that dividend stocks are only for stodgy portfolios or retirees. Whether you are a newbie or are on the brink of retiring, you get quarterly or annual income from stocks that pay dividends. You can also benefit from the potential for capital gains. In short, high-yielding dividend stocks can give your portfolio both income and growth. Cash is not a bad thing, especially when there are so many risks affecting the stock market. Let’s go over some advantages to purchasing dividend stocks, and at the end of the article we will highlight some of the best Canadian dividend stocks for 2017.

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Two different views on dividend paying stocks

Dividend junkies believe that high yielding stocks tend to outperform no yield or low yield stocks over time. Professor Jeremy Siegel of The Wharton School of Business is a staunch advocate of dividend investing. He argues that higher dividend yields allow shareholders to accumulate many more shares (by reinvesting dividends), causing returns to snowball. “Dividends matter a lot,” Siegel writes. “Reinvesting dividends is the critical factor giving the edge to most winning stocks in the long run”.

Focusing only on dividends may cause you to miss diamonds in the rough

On the other hand, dividend mythbusters believe that by focusing only on dividend yield, (the amount of money each share pays you expressed as a percentage per year), that you will overlook high-growth stocks that are in the early stages of expansion. Such companies try to use earnings to fuel fast growth and are not at a stage to return cash to their investors.

All of us as investors like to boast that we were smart enough to spot rising stars like yoga-inspired retailer Lululemon (LLL.TO) that managed to double in price in one year. Lululemon no longer trades on the TSX, but it had richly rewarded investors who got in early.

Yet how many of these trailblazers are we lucky enough to include in our portfolio? Further, in the rush to find high-growth stocks, be aware of the “Growth Trap”. This is the tendency for investors to pay too much for high-growth stocks because they expect too much growth. Be aware of their current price to earnings ratio. If it is too high, it’s probably too good to be true.

Dividend Investing Concepts to Mull Over

As you are figuring out what to do for your portfolio, here are a couple of concepts to think about.

  • The bird-in-hand theory advanced by Gordon and Lintner. It states that investors prefer the certainty of dividends to the potential of capital gains.
  • Dividend income from Canadian stocks is eligible for a nice tax credit for Canadian tax payers.
  • Reinvesting your dividends is akin to dollar cost averaging. You are buying more shares with your high yields and these act as a protection during bear markets. In turn, the extra shares accelerate in value when markets turn bullish again. Jeremy Siegel terms dividend reinvesting the “bear-market protector and return accelerator”.

Special Situation Dividend Stocks

Here are 2 special situations that catalyze stock prices:

  1. A company that is about to increase its dividend because that move signals management’s confidence about the future.
  2. A company that is about to initiate a payout. To some investors this suggests that future growth prospects are not going to be nearly as exciting, but bear in mind, that once a company initiates a dividend, there is a whole new investor base that will create pent-up demand for these shares. Income focused funds and indexes, for example, cannot invest in a stock until it has paid a dividend.

Building a Dividend Stock Portfolio

Diversification is key, and there are conflicting views on how many stocks make a solidly diversified portfolio. Numbers range from 15-60. It may be hard for the average investor to keep track of that many stocks, let alone conduct reasonable research. That’s the reason why dividend ETFs – those that target stocks that have a solid history of paying or increasing dividends – are appealing.

In Canada, high dividend stocks are focused in financials and energy, with a few consumer or industrial names. With a collection of reasonably diversified names, you can build a portfolio that yields in excess of 3%. Here are some of the best Canadian dividend stocks in 2017.

Name Stock Symbol Price as of June 23rd 2017 $ Dividend yield %
Bank Of Montreal BMO.TO 93.46 4
Sun Life Financial SLF.TO 45.64 3.9
Trans Canada Corp TRP.TO 63.20 4
Hydro One H.TO 23.45 3.7
BCE BCE.TO 61.03 4.7
H&R REIT HR.UN 22.39 6
Royal Bank Of Canada RY.TO 93.55 3.7
Enbridge Income Fund ENF.TO 32.71 6.3
CIBC CM.TO 107.70 4.8
TD Bank TD.TO 65.51 3.7

This is by no means a comprehensive list, nor should it be viewed as buy or sell recommendations. It is just a list to get you started on thinking about dividend investing. This list was taken from a  Stocktrades article on the best Canadian dividend stocks for 2017. Also keep in mind that this is a very basic introduction to dividend investing, if you have any questions, and before making any decisions you should talk to your financial advisor.


Ben Graham, the father of value investing, wasn’t born in this century. Nor was he born in the last century. Benjamin Graham – born Benjamin Grossbaum – was born in London, England in 1894. He published the value investing bible Security Analysis in 1934, which was followed by the value investing New Testament The Intelligent Investor in 1949. Warren Buffett, the value investing messiah and Graham’s most famous and successful disciple, was born in 1930 and attended Graham’s classes at Columbia in 1950-51. And the not-so-prodigal son Charlie Munger even has Warren beat by six years – he was born in 1924. I’m not trying to give a history lesson here, but I find these dates very interesting. Value investing is an old strategy. It’s been around for a long time, long before the Capital Asset Pricing Model, long before the Black-Scholes Model, long before CLO’s, long before the founders of today’s hottest high-tech IPOs were even born. And yet people have very short term memories. Once a bull market gets some legs in it, the quest to get “the most money as quickly as possible” causes prices to get bid up. Human nature kicks in and dollar signs start appearing in people’s eyes. New methodologies are touted and fundamental principles are left in the rear view mirror. “Today is always the dawning of a new age. Things are different than they were yesterday. The world is changing and we must adapt.” Yes, all very true statements but the new and “fool-proof” methods and strategies and overleveraging and excess risk-taking only work when the economic environmental conditions allow them to work. Using the latest “fool-proof” investment strategy is like running around a thunderstorm with a lightning rod in your hand: if you’re unharmed after a while then it might seem like you’ve developed a method to avoid getting struck by lightning – but sooner or later you will get hit. And yet value investors are for the most part immune to the thunder and lightning. This isn’t at all to say that value investors never lose money, go bust, or suffer during recessions. However, by sticking to fundamentals and avoiding excessive risk-taking (i.e. dumb decisions), the collective value investor class seems to have much fewer examples of the spectacular crash-and-burn cases that often are found with investors’ who employ different strategies. As a result, value investors have historically outperformed other types of investors over the long term. And there is plenty of empirical evidence to back this up. Check this and this and this and this out. In fact, since 1926 value stocks have outperformed growth stocks by an average of four percentage points annually, according to the authoritative index compiled by finance professors Eugene Fama of the University of Chicago and Kenneth French of Dartmouth College. So, the value investing philosophy has endured for over 80 years and is the most consistently successful strategy that can be applied. And while hot stocks, over-leveraged portfolios, and the newest complicated financial strategies will come and go, making many wishful investors rich very quick and poor even quicker, value investing will quietly continue to help its adherents fatten their wallets. It will always endure and will always remain classically in fashion. In other words, value investing is vintage. Which explains half of this website’s name. As for the value part? The intention of this site is to explain, discuss, ask, learn, teach, and debate those topics and questions that I’ve always been most interested in, and hopefully that you’re most curious about, too. This includes: What is value investing? Value investing strategies Stock picks Company reviews Basic financial concepts Investor profiles Investment ideas Current events Economics Behavioral finance And, ultimately, ways to become a better investor I want to note the importance of the way I use value here. It’s not the simplistic definition of “low P/E” stocks that some financial services lazily use to classify investors, which the word “value” has recently morphed into meaning. To me, value investing equates to the term “Intelligent Investing,” as described by Ben Graham. Intelligent investing involves analyzing a company’s fundamentals and can be characterized by an intense focus on a stock’s price, it’s intrinsic value, and the very important ratio between the two. This is value investing as the term was originally meant to be used decades ago, and is the only way it should be used today. So without much further ado, it’s my very good honor to meet you and you may call me…
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