Here are 5 Best Canadian Dividend Stocks that you can consider Buy and hold in your portfolio during and after COVID-19.
This blog post is NOT a detailed guide on how to choose investment instead just a high-level viewpoint to get started. If you are new to Dividend stock investing you may want to start with this article “How to invest in the stock market – Investing for beginners”. Investors looking to create a diversified portfolio of dividend growth stocks might find the information in this post useful.
Why Dividend-Paying Stocks are popular?
Dividend income from investments is one of the powerful ways to build long-term wealth. If you have enough passive income from your investment it allows you to retire early and manage your time.
When the stock market is down you still receive your dividend payout which reduces overall portfolio volatility and acts as a buffer.
Canadian taxpayers who hold Canadian Dividend stocks (outside of RRSP, TFSA, or RRIF) also qualify for the dividend tax credit. This will reduce your effective tax rate and increase your investment returns.
Identify Dividend Paying Stocks
I recommend starting your dividend investing journey by researching a small number of companies that you already know and admire, preferably in different industries, to analyze their competitive advantage and the core values.
Look into what set these companies apart from their peers, the long-term prospects for the markets in which they operate, and how the overall market values them. Stock is a piece of a company, so long-term sustainable profitability is a key factor
5 Best Canadian Dividend stocks worth investing
The COVID-19 pandemic and market downturn again highlights the value of well-established dividend-paying stocks with strong business prospects. These companies continue to pay dividend yields to their shareholders even in times of turbulence.
These are not a recommendation to buy, instead, it is a list of names that you can begin your research. Always make sure to check the company’s fundamentals and valuations based on your risk tolerance and time horizon.
- Royal Bank
- TD Bank
- Canadian National Railway
- Fortis
- BCE
Royal Bank (RY.TO)
Royal Bank is one of the two largest banks in Canada (along with Toronto Dominion) and has a dominant market share in retail banking products and investment products. RBC has increased its dividend by ~40% in the last five years.
Sector: Financial Services
Industry: Banks
Market Cap: ~119B
Dividend Yield: 5.01%
PE Ratio: 9.30
Dividend Payout Ratio: 46%
Canadian National Railway Ltd. (CNR.TO)
The Canadian National system is a unique railroad network, spanning Canada from east to west and stretching from north to south in the Midwestern United States. I consider this as high quality in industrials.
Ticker: TSE: CNR
Sector: Industrials
Industry: Railroads
Market Cap: ~80B
P/E: 18.35
Dividend Yield: 1.99
Dividend Payout Ratio: 35.45
TD Bank (TD.TO)
TD bank is one of the largest banks in Canada. The US market drives some of their revenues. Their wealth management and retail business do well when the economic recovery takes hold. They are expected to grow their dividend going forward, and that is good for long-term investors.
Sector: Financial Services
Industry: Banks
Market Cap: ~102B
Dividend Yield: 5.2%
PE Ratio: 8.62
Dividend Payout Ratio: 44.92%
Fortis (FTS.TO)
Fortis Inc. operates as an electric and gas utility company in Canada, the United States, and the Caribbean countries. Large Cap Canadian Utilities. It is a defensive low volatility sector, a predictable income model. It has a steady dividend growth rate over more than 10 years
Ticker: TSE: FTS
Sector: Utilities
Industry: Utilities – Regulated
Market Cap: ~24 billion
P/E: 13.93
Dividend Yield: 3.66%
Dividend Payout Ratio: 49.73%
BCE (BCE.TO)
As one of the leading telecoms in Canada, BCE has the built-in advantage of being an established player in a large market with few competitors. The business is divided into three main segments:
- Bell Wireless
- Bell Wireline
- Bell Media
Each of these segments is a market leader in its respective industry.
In addition to its wireless and wireline dominance, BCE owns some of Canada’s most popular media channels through its Bell Media division, including:
- CTV New
- TSN (The Canadian equivalent of ESPN)
- Crave TV
- HBO Canada
- Showtime
Ticker: TSE: BCE
Sector: Communication Services
Industry: Telecom Services
Market Cap: ~90B
P/E: 16.7
Dividend Yield: 5.73
Dividend Payout Ratio: 97%
What makes a BCE investment stand out is the company’s exceptionally high dividend yield. The company’s current yield is around 5%, making it the single safest high yield dividend stock on the Canadian market.
There is no static rules or formula for finding high-quality dividend growth stock. However, there are general principles that are worth looking for when looking for investments. The information below goes over the basics of stock dividends.
Each business on this list offers a compelling investment opportunity in a different way.
They do, however, share some characteristics that make them all rank favorably.
These businesses all offer high dividend yields, promising growth prospects, and low volatility, which together make them excellent long-term investments.
Monitor and Follow up your investments
Check whether these companies continue to perform well and making strides to improve. If it doesn’t meet your standards you take appropriate action and move on.
Individual stock vs Low-cost ETF
If you are not confident about picking individual dividend stock there is an alternative such as ETF. There are plenty of low-cost ETFs that pay great dividends.
The majority of the investors are better off with ETFs than individual stocks.
Some investors like researching the companies and pick winners. I only pick an individual stock if I think the potential of return is higher than the ETFs that I hold. I focus on a small number of high-quality companies and then the rest of my investment is in ETFs. There are no fees with individual stocks but there are management fees for ETFs.
How to Choose the right dividend stocks?
There are thousands of companies that pay a dividend to their shareholders and it can be confusing to decide which are the most likely candidate that survive 15, 20 years from now. How do we choose the winners from losers?
Each investor may have their assessment criteria based on their risk tolerance and timeline. Here are a few valuable metrics that I like to check.
Dividend yield
The dividend yield is the amount of money a company pays to its shareholders for owning a share of its stock divided by its current stock price, displayed as a percentage. A high dividend yield does not mean high returns
Consistent Dividend Growth Rate
We want to focus on those companies that have either maintained or increased their dividends during market downturns. It proves the stability of companies and how they are prepared to handle periods of earnings volatility.
As dividend investors, the last thing you want to see a company in your portfolio cut its dividend. One of the important metrics to look at when you search for sustainable dividend stock is the dividend growth rate. If the companies don’t increase their dividend payout for a few years in a row it is a red flag for a dividend cut.
Look for companies that grow their dividends year after year. Many of the high-quality companies increase their dividend each year consistently for 5, 10, 20+ years and are continuing with this trend. Another important thing to note is that not all dividend-paying stocks are equal. Some of the dividend stocks cut their dividend during market downturns and fail their shareholders. It is important to pick companies that will not only keep their dividend but will also keep increasing it.
Dividend payout ratio (a measure of dividend sustainability)
It is another key metric to check a company’s ability to pay and increase its dividend.
Payout Ratio = (Total Dividends per Share)/(Earnings per Share)
The dividend payout ratio (payout ratio) is the percentage of a company’s earnings paid out as dividends each year to shareholders. If a company has earnings per share(EPS) of $1 and pays out .60 in dividends per share this year, then the payout ratio is 60% (Dividend per share/Earning per share, 0.6/1). In this case, the company is paying out 60% of its profit to shareholders as dividends and keeping 40% of its profit for other purposes such as growing their business, reducing debt, etc. It is very important to check the payout ratio because this gives an indication of dividend sustainability and how safe the dividend is for the long-term. If the payout is too high that may mean the company doesn’t have enough earnings to keep up with its dividend payments.
Companies with the best long-term records of dividend payments have stable payout ratios over many years. If a payout ratio is greater than 100% it suggests a company is paying out more in dividends than its earnings can support, which is widely viewed as unsustainable. Investors must proceed with caution as the company may have to cut its dividend to preserve its business if the payout is too high. I prefer companies with a lower payout ratio, less than 70% at the minimum.
Fair Value of Stock
Before you decide how much to pay for a stock you need to understand how profitable a company is and how much they make per share. If the company makes lots of money consistently then the stock price may be higher.
The stock should be reasonably priced. If a good company is overpriced or overvalued compared to its fundamental value it may not be a good investment. As investors we are looking for a high-quality company that has fair value (undervalued), then our returns may be greater than the sum of dividend yield and dividend growth.
Consistent stock price appreciation
Margin of safety
A company with a strong balance sheet is important for good dividend investment because it increases the chance to survive and grow. They are rewarding their investors but they also retaining enough cash to manage their business. They provide an attractive mix of income, growth, and safety.
Morningstar economic moat
It represents the company’s sustainable competitive advantage. If a company has competitive advantages for more than 20+ years it is considered to have a wide moat as per Morningstar. Does the company has a product or service that is relevant for many decades to come. Since time is important for dividend growth investing we need to look for a company that is built for the long-term.
Morningstar Rating
Morningstar’s rating for stocks is an indication of how far away the price of the stock is from Morningstar’s fair value estimate. A stock with five stars is deemed as undervalued, while a stock with a one-star rating is considered overvalued.
“Compound interest is the eighth wonder of the world. He who understands it, earns it ; he who doesn’t, pays it.”
— Albert Einstein
My investment strategy & Story:
I am an IT professional and manage my investments for the last 15+ years. I read books, take related financial courses, follow Facebook investment groups, listen to a podcast, read blogs, etc. Everyone has different situations so my recommendation is to get educated about investments and decide the best investment for you.
- Diversification is very important for me
- Low Management Fees and Costs for the investments.
- The minimum time commitment for monitoring, researching for investments
- Maintain a long-term approach to investments.
- I own individual stocks, ETFs, REITs, and also Real Estate
- Establish and Maintain an emergency fund
- Continue to educate me as much as possible.
- Need to remind myself to eat better and exercise more because that is the greatest asset that everyone has.
Invest in Yourself
People often ask how can they achieve the performance seen by the world’s greatest investors. What does it take? Everyone wants to turn their small investment into a large amount in a short time. The common trait these great investors share is that they follow a systematic and disciplined approach to their investing. It is not an overnight success. If you are new to investing, it is important to understand and implement these core principles and discipline to stick to them. There are many amazing resources (personal finance books, personal finance blogs, and personal finance podcasts) available to grow your knowledge.
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