Knowing When to Buy Dividend Stocks

With my debt and savings habits under control, lately my thoughts have been more so on investing strategies. One investment strategy that I believe in, as you may know, is dividend investing.

Dividend investing can mean a couple things. It could include investing for yield or dividend growth. Investing for yield is simply basing purchase decisions on the dividend yield of the stock. The higher the percentage yield, the better. The Dogs of the Dow 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. Pick your stocks. Find strong dividend stocks with a history of increasing their dividends over the long term.  A great place to start is our list of best Dividend stocks in Canada.
  2. Calculate the average yield. Do your research and figure out the average stock yield over the past 5 or more years.  One tool for this is Yahoo Finance historic prices tool.  You can select “dividends only” which will list dividend distributions over the past several years (depending on the stock).  Another way, which may be easier, is to use and select “Lower Indicator” to be “Yield”.  It will graphically show you what the yield has been in recent history.
  3. Pick your buy point. Select the yield at which you would be comfortable purchasing and convert that into a stock price.  For example, if Royal Bank’s average yield over the past several years has been around 3.5%, I may pick a buy point of 5% yield.  The current dividend is around $2/share which would equate to a target buy price of $40 ($2/0.05).
  4. Use stock alerts. As we are all busy people, it’s a challenging task to keep your eye on the market which is why I use stock alerts.  There are various ways you can do this such as MSN money alerts, an Excel spreadsheet (with stock addin), or even a Google Spreadsheets (built in stock price functionality).  MSN Alerts are prehaps the most convenient if you are a MSN messenger user.  The spreadsheet option can provide more details, but requires that you check the spreadsheet periodically for buy signals which may or may not be convenient.
  5. Consider signing up to newsletters. More information below:

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 myn fellow blogger Mike from the Dividend Guy Blog since 2013.

logo dividendstocksrock

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 by clicking the button below.

Although not overly detailed, that’s a fairly comprehensive overview on my dividend picking process.  For those of you who are fairly new to the blog, here my most recent dividend portfolio update.

I know there are a good few hardcore dividend investors reading this, do you have anything to add?

In a future post, I will put more details into how I use spreadsheets for stock alerts.

I've Completed My Million Dollar Journey. Let Me Guide You Through Yours!

Sign up below to get a copy of our free eBook: Can I Retire Yet?

Posted in


FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.
Notify of

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Inline Feedbacks
View all comments
7 years ago

Thanks Frugal. If one is a new investor/Smith Manoeuvre investor, does this analysis apply? I.e. Should I be waiting for the right share price before I purchase or should I jump in? I want to get blue chip, dividend paying stocks. It seems to me that this is for those who have an established, growing portfolio, isn’t it? Thanks!

8 years ago

Thanks for the article! I am quite new to investing and trying to test this strategy. Am I calculating the average dividend yield correctly?

1) Average all historical closing prices for a year. I am obtaining my data from the historical prices at Should I pay any attention to the adjusted price?

2) I then divide the annual dividend by the average share price for each year to obtain the average dividend yield for that year.

3) lastly, I average all the calculated dividend yields of the last 5-10 years.

10 years ago

Just look at Manitoba telecoms EPS, does not even cover the dividend!
They are waiting to be bought out, surprised its not happened yet.

The company MUST be making a profit. If not you are speculating, not investing.

10 years ago

As a follow up to my post almost a year ago, look at Manitoba Telecom and notice it’s down almost 15% while XDV (a collection of dividend paying stocks traded as an ETF from Barclays) is up about 10%.

In both cases dividends are excluded.

11 years ago

In my early twenties I built up my porfolio through DCA (monthly deductions off my pay-cheque) on an indexed mutual fund. Once I reached $25k (magic number for waiving discount brokerage fees) I converted the portfolio to TD WaterHouse. I am a firm believer in sticking with your strategy, not chasing the latest fad…so after careful consideration I chose the Dogs of the TSX approach…buying the 10 highest yielding stocks on the TSX 60, then selling them and re-balancing after one year (For some reason May 25th is that date).

I do agree that the high yields are not sustainable, but that’s why you re-balance after one year. Typically these stocks (Dogs because they were “beat up” the previous year, thus leaving a bargain price and a high yield) have a run-up in price, which reduces the Yield and knocks them out of the top 10 the following year. Re-balance and repeat each year. One note, I did cheat this year and take 1 REIT (RioCan) and one Income Trust (Liquor World). There are several variations of this approach, one being to spread out your 10 selections amongst 10 sectors…which I like in theory, but there aren’t any real dividend payers in Health Care and some other sectors.

Two negatives that I find are that you are heavily invested in finance and energy, and my trade fees of $29 are not so attractive…especially if I’m selling and re-buying 10 stocks each year. But once I hit $100k those fees will be reduced to $9. I suppose I could find a cheaper trading site, but I am a lazy investor.

If you are interested in reading more about this approach, David Stanley has done tremendous research on the benefits of the Dogs strategy and how it has out-performed the TSX over the past 25 years.

cashback cards
11 years ago

Would you suggest any free screeners for trying to find dividend? I know I have used yahoo’s before but there should be some other ones that are better.

Also, what other factors beside the dividend can you look at to know that it’s a or at least has the potential for a dividend growth?

Thanks for all that you do and share!

Market Lessons
11 years ago

Well, I for one know that the Dividend Investment Strategy DOES work! But it takes time and patience, and of course good selection of the proper stocks that usually increase their dividends over time. In fact if you stay with the strategy long enough, your investment income will be beating the overall market returns over most years. And remember, this is actual income (money in pocket), not “just” capital gains which are always nice too. Most companies that increase their dividends will see an eventual increase in their stock price over time (buy and HOLD) as well. How many here have seen an increase in their portfolio’s income this past year? Mine did! By using this strategy faithfully you will get the same results. Learn and DO………………….

11 years ago

I look at a couple of other criteria – payout ratio and overall return. If the payout ratio is too high for the industry (financials don’t have the same acceptable payout ratios as REITs for example which often go above 100%) then it is a no go.

The comment about telcos is a great example for the 2nd criterion. There are a lot of telcos which have nice yields but lousy returns on the stock price itself. Look at Manitoba Telecom – yield is currently over 8% but the stock has a negative return in the last 1, 3 and 5 year periods. You are more likely going to see a dividend cut rather than an increase if the underlying stock price is going down.

Used Tires
11 years ago

Pretty awesome to read your strategy when it comes to buying Dividend Stocks, we’ve been learning in our Corporate finance class to do all the math and calculations when it comes to stock and determining the stock values based on the dividend that will be paid out, etc, pretty fun stuff =D

Till then,


Ed Rempel
11 years ago

Hi FT,

Do you focus on Canadian dividends (for the preferred tax treatment), or the best companies anywhere in terms of yield and dividend growth?

What do you do to avoid looking like a TSX index fund?