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The first step to understanding the concept of dividend stocks is knowing the term’s meaning. So, here we go: dividend stocks are equity of companies that distribute part of their profits to shareholders regularly. Depending on the company, shareholders receive this payment either as cash or additional shares.
A company has to be profit-making before it can promise and deliver dividend payments to shareholders. Most if not all of the dividend stocks are companies established enough to sustain such a program.
Dividend payments’ purpose is twofold. First, the regular payments allow shareholders to build long-term wealth by staying with the same stock for longer. This way, the program creates a bond with the shareholders.
Secondly, dividend payments are a tool of attraction for even more investors. Recall the laws of supply and demand and how they interact with the price of products/services. The more investors want to buy a certain stock, the higher its price climbs.
Now that we are essentially speaking about dividends, you should know that these payments influence a stock’s price. In the first place, a stock is often popular when the company has a great history of dividend payments. What do we mean by this?
Consider two dividend stocks. Company A has always maintained a dividend payout ratio slightly above 50% since it started the program decades ago. On the other hand, Company B has a history of a fluctuating dividend payout ratio. Over the past five years, the company’s dividend payout ratio was 67%, 32%, 51%, 18%, and 60%, respectively.
Looking at the two companies, one notices stability and predictability in Company A, something that Company Blacks. In this scenario, Company A’s stock price is likely to remain stable and continuously grow, unlike Company B’s, whose volatility might sometimes be unbearable.
Dividend-paying stocks rhyme with stability. These stocks resemble bonds because we can liken the dividends to bond coupons. Even as you wait to benefit from the possible appreciation in the price of the stock, the possibility of earning a fixed income brings peace of mind.
In other words, dividend investing is akin to killing two birds with one stone. On the one hand, you have a steady stream of income while, on the other hand, you enjoy ownership of the company.
Additionally, dividends could be a tool to hedge against inflation. How do dividends maintain inflation’s pace? Higher prices often translate to higher profits. In such a case, dividend-paying companies will also raise the dividend amount they pay, assuming they maintain the payout ratio.
Yield is a technical term for return on investment. The yield is the payment you get for every dollar you commit to the stock at the current dividend rate. The simplest way to reckon the dividend stock yield is to divide the cash dividend (if the company pays in cash) by the stock’s price. Dividend stocks with high yield rates are ideal for dividend investing.
The dividends that companies pay grow with time, but the rate of growth differs. Companies with higher-than-average dividends are less likely to increase the payout ratio, but the growth rate will be very low if they increase the payout. As such, one is wiser if one picks a dividend stock whose dividends are lower than average. The potential for the dividends’ growth is higher in this case.
Dividend safety boils down to a company’s dividend coverage ratio. The dividend coverage ratio measures the frequency of a company’s dividend payments; the higher the ratio, the safer the dividend. You would also feel safer if the company pays out at most 60% of its wealth to shareholders.
1. Algonquin Power & Utilities Corp (TSE: AQN, NYSE: AQN)
Close to two-thirds of Algonquin Power’s business centers on electricity, natural gas, and water, essential utility businesses. The rest of the business deals with renewable energy operation, development, generation, and distribution. Regardless of the economic situation, people will still need water, electricity, gas. As such, demand for Algonquin’s services has a strong base, and renewable energy is likely to elbow out dirty energy such as oil and coal in the foreseeable future.
Also, Algonquin is in the process of expanding its operations by acquiring full control of Empresa de Servicios Sanitarios de Los Lagos S.A. (ESSAL), a major player in Chile’s water utility sector. ESSAL will be the second major acquisition after Algonquin completed the takeover of Bermuda Electric Light Company (BELCO), an Ascendant Group Limited’s major subsidiary.
Lastly, AQN currently pays a 4% dividend, which means the company has plenty of runways to grow the payout ratio with time.
2. TELUS Corporation (TSE: T, NYSE: TU)
TELUS is not only a dividend stock but also a growth stock. Particularly attractive about the stock is the number of attractive opportunities lying ahead. For example, TELUS is laying the groundwork for a major broadband coverage network via the TELUS PureFibre network because the current network is not as extensive as it should.
Further, TELUS just raised dividends to 7% from 5%. Given TELUS’s growing capacity to increase income and digital business opportunities, the company has great potential to continue increasing the dividend in many more quarters ahead.
3. Royal Bank of Canada (TSE: RY, NYSE: RY)
Granted, the Royal Bank of Canada is not a growth stock. The stock has been paying dividends for over one and a half centuries, whose payout ratio now stands at 54.9%. The dividend yield is also at 4.4%, which is high enough in comparison to the industry average.
Obviously, RY offers dividend safety and stability, making it a useful addition to your portfolio.
4. Fortis Inc. (TSE: FTS, NYSE: FTS)
Fortis has significant operations in the utility sectors of both Canada and the United States. The business’s income reliability makes FTS a popular dividend stock, especially in the current uncertain times.
The company’s business is low risk, diversified, and highly regulated. With a 72% payout ratio and a dividend yield of 3.6%, Fortis should become increasingly popular this year. Plus, the company has a history of raising the payout ratio, having done so for the last 46 years back-to-back.
Dividend stocks are those that share part of their wealth with their shareholders regularly.
You should make various considerations when looking to invest in dividend stocks, including yields, dividend safety, and the growth rate of the dividend payments.
Dividend stocks offer passive income, which means the stocks can be used as a tool for inflation hedging. Also, these stocks enable you to kill two birds with one stone; that is, you get regular income and give you ownership.
Dividend investing is a great strategy, especially in an environment of uncertainty. Such stocks help to reduce the risk in your portfolio.
