I wrote my original thoughts on when to buy dividend stocks roughly a decade ago – and with my best dividend stocks in Canada article one of the most popular on the site, I thought it was the perfect time for an update.
Dividend investing can mean a couple things. It could include investing for dividend yield or dividend growth. Investing for yield is simply basing purchase decisions on the percentage dividend yield of the stock. The higher the percentage yield, the better. The Dogs of the TSX investing strategy comes to mind for this one.
In my opinion, basing investment decisions on yield alone is a dangerous game. More times than not, an abnormally high yield simply means an unsustainable dividend. When the dividend payouts become too much for the company to carry, dividends are typically cut dragging the stock price with it.
Investing for dividend growth is making purchase decisions based on the history of growing dividend payments over the years. Although the initial purchase yield may be lower, it’s a great strategy for buy and hold investors as it gives raises to loyal shareholders over time. Buying and holding dividend growth stocks is more in alignment with my beliefs and is one of the key components in my dividend investing strategy.
Having explained the two strategies, I use a combination of the two when making purchase decisions. I narrow down the list of strong dividend companies based on a history of dividend growth, but only make my purchase when that particular stock reaches a yield threshold.
How do I determine the yield threshold? By going back through the history of dividend payments and figuring out the average yield over the years. Once that is determined, I usually pick a yield that is above average which then can be converted into a target stock price. From there, I can watch the market (or use alerts) to indicate that it’s time to pick up a new position.
The Process of Finding Dividend Stocks to Buy
1) Create a prospective dividend stock watchlist: Find strong dividend stocks with a history of increasing their dividends over the long term. I like to start my research using three filters; revenue, EPS, and dividend growth over the past 5 years.
2) Look at Revenues: A business is not a business without revenues. What is the difference between a company making growing revenues versus a company showing stagnating results? We are looking for companies with several growth vectors that will ensure consistent sales increases year after year.
3) Consider Earnings: You cannot pay dividends if you don’t earn money. Then again, this is a very simple statement. Still, if earnings don’t grow strongly, there is no point in thinking that the dividend payment will increase indefinitely.
4) Dividends.. Duh: Last but not least, dividend payments are the *obvious* backbone of any dividend growth investing strategy. But I don’t mind the real dollar amounts or the yield, I focus solely on dividend growth. Dividend growers show confidence in their business model.
5) Understand the Business Model: Selecting stocks based on metrics is a good start, but if you don’t understand how the company makes money, you won’t understand opportunities and threats coming down the road. Write down your investment thesis (the reasons why you want to invest in this company, definite its growth potential but also its potential downside).
6) Get Help With the Heavy Lifting: Market fluctuations create confusion and leave you with the impression you will lose your entire nest egg. Then, you read more blogs, watch more videos, and listen to more podcasts. You receive so much conflicting information that you end-up in paralysis by analysis.
Consider the only source of dividend information that I trust (along with my initial research) – Dividend stock rocks (DSR). This is not just a weekly newsletter with stock picks. It’s a program that will help you manage your portfolio and improve your results. You can first read our detailed DSR review.
Safe Bets – Canadian Dividend Stocks To Buy At Any Time
Below is a list of DSR’s most recommend dividend stocks. These have outperformed consistently and you can’t go wrong with investing in any of them.
5yr Revenue Growth
5yr EPS Growth
5yr Dividend Growth
(Hidden, click for access)
When to Buy Dividend Stocks In 2022
One of my favourite parts of dividend investing is that you do not have to time the market to make money. Enbridge or the Canadian Banks are going to pay dividends no matter what their share price does!
With interest rates looking to increase, dividend investing through Canadian bank stocks is a no-brainer as we pass from 2021 to 2022. There simply isn’t a safer hedge against inflation from what I can see, as banks are known to do well in high interest rate environments.
If rates stay low, you might not get quite the returns that tech growth stocks will generate, but Canadian banks have produced under any conditions the last few years.
For other ultra-safe options in 2022, I’d check out our Canadian dividend kings and dividend aristocrats article. For rock solid companies like that, the classic phrase, “It’s time in the market, not timing the market that is most important,” rings true.
On the opposite side of the spectrum, I’m not nearly as confident about when to buy dividend stocks in the energy sector right now. Sure, oil prices are headed in the right direction, but with such a topsy-turvy world out there, I’d recommend checking out this article about Canada energy stocks first.
The most important thing to remember about when to buy dividend stocks is that you do not need to obsess over the details in order to benefit from the strategy. The simplicity of investing in solid dividend-growing companies in “good weather and bad” is one of the main things that attracts me to it.
Don’t worry about stuff like ex-dividend dates or the latest pipeline court case. Avoid paralysis by analysis, keep an eye on your favourite dividend-growers, and lean on DSR if you need a little help along the way!
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