Canadian Dividend Paying Stock Investing

This is a guest post from Zach over at Dividend Stocks Online where his blog helps investors find the highest yielding dividend stocks.  While OMD isn’t an investing blog, we do try to cover the basics and benefits of investing.  This post provides a good overview of dividend paying stock investing (with a Canadian focus). 

I’ll note as you travel out on The Crown Money Map you’ll find that destination 5 tells you to begin investing wisely.  Investing in dividend paying stocks can be yet another way to build wealth.  However, if you choose to invest in indivdual stocks you need to commit the time and effort to thoroughly research your potential investments.  Overall, individual stock investing is more risky than mutual fund investing.  Zach does mention dividend paying mutual funds in this post which you’ll definitely want to consider if you’re at the investing stage of your journey.

It is not easy to work for a paycheck. Even for those that own their own business, the hours spent ensuring that everything is working perfectly can be challenging. However, income investing can be the solution for many.

Income investing is the ultimate source of passive income. You invest time or money upfront to create or buy something that will yield dividends for life. The best examples are stocks that pay dividends. Dividend paying stocks free up your life as they pay you an income in the form of a dividend payout. If the company is strong, the value of your initial investment increases.

You have to be careful to pick the best stocks that pay dividends. The best results come from companies that have a strong balance sheet. Find companies that have a low debt ratio. You do not want a company that pays dividends from debt.

Be wary of companies that pay more dividends than they earn. They may be paying dividends from debt or their assets. Such a situation may not last for long and they may end up cutting their dividends to stay afloat.

Canadian dividend stocks make excellent income investing vehicles. One of their major advantages is that they provide tax advantages for the investors. Thanks to the Canadian dividend tax credit, some low-income earners do not pay tax on Canadian stock dividends. In the long run, you may be better off investing in tax free investments than government bonds.

Look for Canadian stocks that have a good history of paying dividends. Most Canadian stocks that pay dividends pay between 2% and 6%. While higher dividend rates may sound good on paper, they represent a higher risk. If you are a conservative income investor and planning for the long term, choose lower yielding stocks as they are likely to pay off.

Key items to focus in on are the dividend growth rate and payout ratio. When a company reduces its dividend it indicates that growth for that stock is slowing or expected to slow down in the future. It also reduces the yield, which is ultimately why we wanted to buy that stock in the first place. Look for dividend stocks that have a dividend growth rate of 5% or higher.

The payout ratio is important because it measure the percentage of net income paid out as a dividend. If a company has a payout ratio of 100% then they are paying all of the income out to shareholders. In rare cases that is being done on purpose, but in general we want to find stocks with a payout ratio under 60%.

Most of us do not have enough capital to invest to live on . However, it is important to make a start. One of the ways to do this is to use ETF’s such as he iShares Canadian Dividend Index Fund. This allows you to make small investments in dividend yielding stocks with the little funds you have.

Dividend reinvestment plans or DRIP’s are another great way to build your income-investing portfolio. In this case, instead of receiving your dividend payment, companies allow you to buy more stock. You can also invest in dividend mutual funds. These will invest in dividend yielding Canadian stocks and pay regular dividends.

The goal of income investing is to reduce your reliance on working for a living. It may be difficult to build a Canadian dividend stocks portfolio but the rewards mean more time for your family.

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