If you’ve been following for a while, you will come to learn that I’m a fan of two investing strategies, index investing (buying the broad market with low fee ETFs/mutual funds) and income producing dividend growth investing.
I like index investing for its ease, low cost, and ability to beat most active mutual fund returns over the long term. I use this strategy for: my spouse’s RRSP; the international portion of my RRSP; and, the education fund that I setup for my two kids.
Dividend growth investing is another beast. Although, if executed correctly has the potential for long term market beating returns, I’m really in it for the income. There’s something about the idea of owning a piece of the very best companies out there, being paid to own them with annual raises, and using very little effort on my part. It really is the definition of passive income. The cherry on the cake is that Canadian dividends get preferential tax treatment (for now).
A reader question that I often get is “what dividend stocks should I buy?” I tend to cringe a little at that question because I believe in picking dividend stocks as part of an overall dividend portfolio, rather than buying a couple stocks for a big win. If i were to start with just a few, the dividend kings list is were i’ll look first.
Building a Dividend Portfolio
Having said that, what stocks would I pick to build a diversified dividend portfolio? Here is the criteria that I review when making a purchase:
- Sector Diversification – Since a large portion of our portfolio is Canadian based, I try to diversify by picking dividend stocks by sector. Some use broader sectors, I tend to use: telecom; pipelines; financials; resources and materials; utilities; health care; consumer; industrials; real estate; and, technology.
- Dividend Growth History – As previously mentioned, I follow the dividend growth investing strategy, which means that I tend to choose dividend stocks that have a history increasing their dividend annually.
- Earnings History – Even with a solid dividend growth history, a safe bet is to make sure that their earnings are growing with the same trend as well. It may be a warning flag if earnings are decreasing while dividends are increasing. It may only be a matter of time before dividends will need to be reduced, or worse, eliminated.
- Yield above 2% (but high yields may be a a warning) – As my plan is to eventually live off dividends one day, I prefer to be rewarded with a yield that is higher than 2%. Ideally, the yield would be greater than 2.5% but less than 6%. Why not the higher yield? Generally speaking, if a dividend stock averages in the 3% range over the long term, but then spikes to over 6%, it could be an indication of a dividend cut coming as high yields can be unsustainable. On the other hand, it could also mean that it’s oversold and a value play. It really depends on the situation which means that more research into the company is warranted.
- Market Cap – My core dividend positions are generally larger market cap companies (ie. big company) with a long history of dividend increases and a long term competitive advantage.
Strong Dividend Stocks by Sector
Here are some of my favorite dividend stocks sorted by sector. Note that these are not recommendations and should be used for informational purposes only. Also note that this portfolio has a Canadian bias, so if you need more diversification, you’ll need to pick up more US and international positions. Personally, I typically use an ETF to diversify my portfolio with international exposure.
One more thing, not all of the positions below perfectly fit the criteria that I listed previously. So best to use this list as a starting point for your research.
- Telecom – BCE (BCE), Telus (T), Rogers (RCI.B), AT&T (US:T), Verizon (US: VZ).
- Pipelines – Enbridge (ENB), TransCanada Corp (TRP).
- Financials – Any of the big banks: Royal Bank (RY), Toronto Dominion Bank (TD), Scotia Bank (BNS), Bank of Montreal (BMO), CIBC (CM); Insurance: Manulife (MFC), Great-West Life (GWO), Sunlife (SLF).
- Resources and Materials – Suncor (SU), Agrium (AGU), Exxon (US: XOM), Chevron (US: CVX).
- Utilities – Fortis (FTS), Canadian Utilities (CU), Emera (EMA), Brookfield Infrasturcture Partners (BIP.UN).
- Health Care – Johnson and Johnson (US: JNJ), AbbVie (US: ABBV), Cardinal Health (US: CAH).
- Consumer – Empire (EMP.A), Loblaws (L), Walmart (US: WMT), Procter and Gamble (US: PG).
- Industrials – Canadian Pacific Railway (CP), Canadian National Railway (CNR), Finning International (FTT), Emerson Electric (US: EMR).
- Technology – Microsoft (US: MSFT), Intel (US: INTC), Apple (US: AAPL).
- Real Estate – Riocan (REI.UN), Canadian Real Estate Trust (REF.UN), Smart REIT (SRU.UN).
If you are interested in my personal positions, you can see some of my favorite dividend holdings here.
Taking Dividend Investing to the Next Level
Dividend Stocks Rocks (DSR), is a highly recommend newsletter and product if you want to take your dividend investing to the next level . It is managed by my fellow blogger Mike Heroux from the Dividend Guy Blog since 2013.
DSR is not just a weekly newsletter with stock picks. It’s a program that will help you manage portfolio and improve your results. You can first read our detailed DSR review, or sign up now using our exclusive 45% lifetime discount by clicking the button below.
If you are interested in dividend investing, but not interested in picking individual stocks, then the next best thing is to own a dividend ETF. The only downside with owning Canadian based dividend ETFs is that you may get a concentration in a particular sector, like financials in Canada.
Here is an article that summarizes a number of Canadian dividend ETFs. The ETFs include:
- S&P/TSX Canadian Dividend Aristocrats Index Fund (CDZ) (MER: 0.67%)
- Dow Jones Canada Select Dividend Index Fund (XDV) (MER: 0.56%)
- FTSE Canadian High Dividend Yield Index ETF (VDY) (MER: 0.22%)
- BMO Canadian Dividend ETF (ZDV) (MER: 0.39%)
Since that article, PowerShares released a dividend ETF, that is quite attractive – trading symbol PDC. It tracks the NASDAQ Select Canadian Dividend Index, and charges a MER of 0.50% which unfortunately is a bit on the high side. What I like about this ETF is that is has less exposure to financials than others and it includes real estate exposure via real estate investment trusts (REITs).
If you want to go the ETF route, I would highly suggest that you visit their respective websites to see the sector exposure that you are getting. Most of them will have very little real estate exposure, so you may want to add a REIT or two depending on your existing real estate exposure. More on this below is available on the best dividend ETFs in Canada article.
Discover the best free ETF brokers in Canada
View our detailed Canadian broker analysis
Real Estate Investment Trusts (REITs)
I’ve written about REITs in the past and holding some of the larger Canadian names in my TFSA for quite some time. Although REITs generally have a higher than average distribution yield, they are not known to have an increasing annual dividend. The exception being Canadian Real Estate Investment Trust (REF.UN) which has a respectable 15 year streak.
Rather than picking individual REITs, you may want to use a REIT ETF instead. Some of the available options include:
- iShares S&P/TSX Capped REIT Index ETF (XRE) (MER: 0.61%)
- FTSE Canadian Capped REIT Index ETF (VRE) (MER: 0.39%)
- BMO Equal Weight REITs Index ETF (ZRE) (MER: 0.61%)
To me though, these REITs charge quite a bit for very few holdings. For example, XRE has 16 holdings with VRE/ZRE not much better with 19 holdings. The top 10 holdings of each of these ETFs make up about 75% of the entire ETF. Personally, I would prefer to pay 0% MER and get semi-close tracking of the REIT index by owning the top 5 holdings – REI.UN; HR.UN; CAR.UN; SRU.UN; and, REF.UN. Owning these positions will give you about 55% of the REIT index.
There you have it, a summary of how I pick dividend stocks and a listing of current favorites by sector. This should give you a general idea on where to start when looking for quality dividend names in Canada and even a few positions in the US. As another disclaimer, I own a number of positions mentioned in this article.
To supplement this article, take a look at: