Many Canadians are using dividend stocks as a way to boost their income. For those who are new to the market, dividend stocks are those that pay shareholders a portion of their earnings simply for holding shares in the company. Although it’s generally easier to invest in dividend stocks than growth stocks, for a number of reasons, there are still a few fundamentals that investors should consider. In this article, I’ll discuss how you can invest in dividend stocks to add some additional income to your life.
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Look for a long history of dividend payments
When I look for dividend stocks to hold in my portfolio, I first try to find companies that have a long history of paying dividends. If you can find companies that have been able to distribute dividends through major economic downturns, then I’d say you’re off to a good start. Bank of Nova Scotia (TSX:BNS) is an example of such a company.
One of Canada’s Big Five banks, Bank of Nova Scotia has been paying shareholders a dividend since 1833. For those keeping track, that represents 190 years of continuous dividend payments. Investors getting into this stock today can also take advantage of a massive 7.01% dividend yield. If you’re interested in a solid blue-chip stock that can deliver a reliable dividend, then Bank of Nova Scotia should be on your radar.
Try to find companies that increase distributions each year
In addition to finding stocks that can distribute dividends each year, investors should look for stocks that are able to raise their dividends year after year. This is important because a stagnant dividend could lead to investors losing buying power over time. As a rule of thumb, investors should aim to have their portfolio rise at a faster rate than inflation. So, aim to hold dividends that grow their dividends at a rate of 2% or greater each year.
Fortis (TSX:FTS) is an excellent company to consider. This utility company serves more than three million customers across Canada, the United States, and the Caribbean. Fortis has made a name for itself due to its outstanding track record of raising its dividend. Currently, Fortis holds the second-longest active dividend-growth streak in Canada (50 years). The company plans to continue raising its dividend through to 2028 at a rate of 4-6%.
Look for a low dividend-payout ratio
Finally, look for dividend stocks that can maintain a low dividend payout ratio. Essentially, this is the ratio between a company’s dividend and its earnings. A lower dividend payout ratio suggests that a company could continue raising its dividend more comfortably in the future. This is especially true during times of economic uncertainty, where earnings may dip temporarily.
Alimentation Couche-Tard (TSX:ATD) is a great example of a company that maintains a low payout ratio. For those that aren’t familiar, Alimentation Couche-Tard operates more than 14,000 locations across 25 countries and territories. Alimentation Couche-Tard also operates under several banners, including Mac’s, On the Run, Circle K, and many more. As of this writing, Alimentation Couche-Tard’s dividend-payout ratio stands at 13%. That gives it a lot of room to continue raising its distribution in the coming years.
