First things first, if you are interested in dividend investing, I strongly suggest you to download your free copy of Dividend Investing: How To Build a Never Ending Cash Distributor from The Dividend Guy Blog. I’ve also created a unique resources about Canadian Dividend Stocks.
Looking for Canadian Dividend Stocks? I recently mentioned that I was working on a dividend investing website. As I was creating its content; I realized something; my top dividend stocks articles on The Financial Blogger were not exactly what you can call “Best Canadian Dividend Stocks”. They were indeed the highest yield dividend stocks on the Canadian stock market, but they were not necessarily what you can call “best investments”. This is why I have decided to upgrade the site and modify my 3 lists of “top Canadian dividend stocks”.
The problem with high yield dividend stocks
There are 2 major problems with what we call “high yield” dividend stocks:
#1 The dividend yield is too high
Have you ever heard the old saying “where there is smoke, there is fire”? This is the exact thought that should cross your mind when you see a very appealing dividend yield. In financial theory, there is one very basic principle; the higher yield comes with higher risk. So if the dividend yield is too high, this Canadian company is probably experiencing some financial difficulties or delivering poor financial results. The stock has either dropped significantly over bad news or the market thinks it won’t be able to sustain its dividend over the long run. In both cases, you should be cautious before buying this “high paying dividend stock”.
#2 The payout ratio goes in the same direction as the dividend yield; too high!
If a company has some financial weaknesses, chances are that its dividend payout ratio is heading higher than 75%. Which means that it won’t be able to keep paying its high dividend or it will have to finance it to maintain such high yield. Receiving high dividend payouts is always fun… as long as you can count on receiving it!
Define “Best Canadian Dividend Stocks”
This is when I came up with the idea of maintaining 3 lists of Canadian Dividend Stocks. But this time, the 3 lists have clear definitions:
In order to find the top 10 Canadian dividend stocks, I had to define important criteria for the selection of my stocks:
– Dividend minimum yield: 3% (so I ignore low dividend yield stocks)
– Dividend maximum yield: 7% (so I ignore abnormalities 😉 )
– Dividend payout ratio: under 60% (so I make sure that dividends will be paid consistently)
– Dividend growth: minimum of 5% annualized growth over 5 years
– P/E ratio: under 15
With these criteria, I know I will be able to find the best 10 Canadian Dividend Stocks of the moment. This list will be now updated quarterly and showed on the side bar in the must read section.
In order to find more high quality dividend stocks, I had to loosen up my search criteria. Here’s how I have created the best 20 Canadian Dividend Stocks:
– Dividend minimum yield: 3%
– Dividend maximum yield: no maximum
– Dividend payout ratio: under 80%
– P/E ratio: under 20
There are obviously some overlaps with the top 10 but it still gives you more options with softer search criteria. The goal of this list is to include stocks that might be overpriced or having a higher dividend payout ratio due to specific and known situations. This can enlarge your scope and give you more options to include Canadian dividend stocks in your portfolio.
The top 50 Canadian Dividend Stocks will keep its original definition: this will be the highest Canadian dividend stocks on the market. These are obviously more risky for investors as the stocks will have abnormally high dividend yields and payout ratios over 100% most of the time. Trading is at your own risk in these cases ;-).
This post was a prelude to the launch of What is Dividend? Dividend investing is an amazing way for young investors to build a solid portfolio by taking less risk. This is why I wanted to create a site where you can learn all about dividends. Stay tuned as next week, I’ll be explaining how I built my most recent niche website based on dividend investing. This time, I have created a very high quality niche website with no compromises ;-).
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