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When it comes to investing in the stock markets there are multiple strategies. There is value investing where you identify stocks that are trading at a discount to their intrinsic value. Basically, these stocks are undervalued but have a strong economic moat as well as robust fundamentals, making them solid long-term picks.

In the last decade, growth stocks, especially from the technology sector, have created massive wealth for investors. Growth stocks are companies that increase their revenue and earnings at a faster rate compared to the overall market. These tickers generally have a high beta which means they will outperform the broader indexes in a bull run but may grossly underperform in a market sell-off.

Alternatively, investors can also look at dividend investing as an option to create wealth in the equity markets. A company that generates consistent profits may decide to allocate a portion of its net income to shareholders in the form of dividends.

Now, dividend investing is a strategy where you buy stocks of companies that pay dividends. Here, investors can benefit from a passive income stream that can be withdrawn or reinvested to benefit from the power of compounding.


Click here to skip the dividend investing crash course and jump directly to our list of 20 dividend stocks.


The basics of dividend investing

One of the primary reasons why dividend investing has always remained popular is because this strategy allows the investor to benefit from a steady stream of dividend income as well as via long-term capital gains.

It is also a strategy that is attractive to investors who have a lower risk appetite. Companies that pay dividends to shareholders tend to have a low beta and a business model that allows them to generate predictable cash flows across economic cycles. However, as is the case with several equity investments, even dividend stocks can be a risky proposition especially if you don’t know what you are looking for.


What is the dividend yield?

One of the most important metrics for dividend-paying companies is the dividend yield also known as the forward yield. For example, if you buy 100 shares of Enbridge stock that is currently trading at $45.35, you will have to invest $4,535. Now Enbridge pays an annual dividend of $3.34 per share which means you will derive $334 in yearly dividends.

This indicates a tasty yield of 7.36% which is really impressive given that bond rates are less than 2%. Now, you can either reinvest these dividends to buy more shares of Enbridge or shares of any other company. Alternatively, you can withdraw this payout and keep it in your savings account or even use it to pay your utility bills.

Investors will benefit from regular dividend payouts irrespective of the company’s stock price which might move higher or lower over the course of the year. You will receive the payouts as long as the company’s Board of Directors authorizes these payments.

Companies that pay a dividend generally do so on a quarterly basis. A few companies also pay dividends each month. Now, it is difficult for companies to consistently maintain these payments across business cycles. Like we have seen several companies across sectors reduced or entirely suspended their dividend program amid the COVID-19 pandemic.

It is thus imperative to identify a portfolio of dividend-paying companies that have a strong balance sheet and the ability to generate stable cash flows irrespective of the state of the economy. When you integrate the dividends with long-term capital gains the total returns should normally outpace major indexes.

How to evaluate dividend stocks?

Now that we have covered the basics of dividend investing, let’s take a look at the key metrics required to evaluate these companies. You need to understand which dividend-paying company to buy and hold over the long-term. The below financial metrics will help the investor understand if a company is worth investing in or not, as well as identify potential red flags.

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Dividend Yield

As seen above, the dividend yield is calculated as a percentage of a company’s stock price. So, in case a stock trades at $100 and pays an annual dividend of $5, the dividend yield would amount to 5%.

While a higher dividend yield is always attractive you need to understand that it is inversely related to the stock price. For example, if the stock price of the company falls by 25% to $75 its dividend yield will increase to 6.7%.

A high yield can hence be a red flag for investors. Canada-based Chemtrade Logistics Income Fund has a forward yield of 8.6%. However, the company cut its dividend payout by 50% in 2020 and the stock has lost 65% in market value since September 2017 as well. It’s clearly a stock that has burnt massive investor wealth.

Ideally, a dividend-paying company should have the ability to at least maintain its dividend and grow it over time.


Payout ratio

This is another important metric investors should use while evaluating dividend stocks. The payout ratio is calculated as a percentage of a firm’s net earnings. So, if the firm earns $5 per share as its net income and pays dividends of $3 per share, it has a payout ratio of 60%.

If the payout ratio is low, it means the company has more room to reinvest its earnings in capital expenditures which in turn will bring in additional cash flows. Alternatively, the company can also look to increase dividends.


Capital gains

Capital gains are calculated as the increase in a company’s stock price as well as dividends paid. So, in the case of the above company, if its stock price increases to $105 and it pays a dividend of $5, then you would have derived annual returns of 10%.

Any company that consistently outpaces the broader markets in terms of total capital gains is a good stock to buy and hold.


Earnings per share

The EPS (earnings per share) ratio is derived by dividing a company’s net income by the total number of shares outstanding. It basically tells you the amount of money a company makes for each outstanding share.

Now, you need to shortlist companies that have grown earnings over time. This indicates the company is able to improve its bottom-line which in turn will help it sustain dividend payments.


Price to earnings

The price to earnings multiple is a popular valuation ratio that shows us how expensive a stock is. It is calculated by dividing the price of a stock by its EPS. As a rule of thumb, in case a company’s P/E ratio is lower than the sum of its earnings growth and dividend yield, it is undervalued and vice versa.

You need to avoid the dividend yield trap

Investors without any experience in the equity markets might equate a high yield as an attractive investment opportunity. However, as we have seen above, while a high yield is a good filter to identify dividend stocks, you need to look at the reasons behind these figures.

In case a stock continues to spiral downwards, it means it is fundamentally weak or is impacted by macro-economic factors. It may also lead to a dividend cut which may further impact the stock price. So, how do you avoid falling into a dividend yield trap?

Just buying stocks due to their high yield is a recipe for disaster. If a company has a forward yield that is significantly higher than its industry peers, it may be a red flag. You need to look at the company’s payout ratio as well as analyze its balance sheet, income statements, and cash flows.

A company with a stellar dividend history and one that has increased dividends each year indicates that it has a solid business model that allows it to generate cash flows to support an increase in payouts.

It’s always better to buy a stock with a lower dividend yield that is sustainable compared to a stock with a high yield that may be rolled back if markets turn ugly.

Long-term investors that aim to grow their savings can look at DRIPs (dividend reinvestment plan) to achieve financial goals. The DRIP is a robust tool that allows you to reinvest the dividends you earn to buy additional shares of the company. This is done without charging any fees or commissions and is one of the ways to benefit from the power of compounding.


Dividends are not a guarantee

Investors need to understand that dividend payments are not a guarantee and can be suspended at any time. When oil prices crashed in 2020, several companies such as Suncor Energy cut their dividends. Many others suspended their payouts indefinitely.

Dividends are part of a company’s profits. Generally, a company can look to reinvest its net income to expand its capital expenditure program, lower its debt or acquire other companies to benefit from inorganic growth.

Dividend payments are not compulsory and if a company is looking to reduce costs or is grappling with negative profit margins, there is a good chance for dividends to be at risk.

It is thus imperative to build a portfolio of quality dividend-paying companies across sectors to mitigate risks. Like every other asset class, it is not possible for dividend investors to eliminate their risk completely.

Here we look at 20 dividend-paying Canadian companies that should be on your watchlist right now.


Canada’s Dividend Aristocrats

These companies have managed to increase their dividend yields for at least 25 consecutive years.

Canadian Utilities

Canadian Utilities is engaged in the electricity, natural gas, and energy businesses. Its Utilities business provides regulated electricity transmission and distribution services in the Yukon, northern and central east Alberta, and Northwest territories.

The company also owns and operates 9,000 km of natural gas pipelines, 16 compressor sites, and 3,700 receipt and delivery points. Canadian Utilities’ energy infrastructure business provides electricity generation, natural gas storage, industrial water to regions in Canada.

Canadian Utilities has managed to increase its dividend payments for 48 consecutive years. In the last five years, it has increased dividends at an annual rate of 9.6%. Canadian Utilities stock is currently trading at $33.3 indicating a forward yield of 5.3%.


Another utility stock on the list is Fortis. Utility companies are regulated, which helps them generate stable and predictable cash flows. People will continue to pay their electricity and gas bills even when they are unemployed making this industry fairly recession-proof.

Fortis is an electric gas and utility company that generates, transmits, and distributes electricity to 433,000 retail customers in Canada, the U.S., and the Caribbean. It also sells wholesale electricity to enterprises south of the border.

Fortis has managed to increase its dividend payments for 46 consecutive years. In the last five years, it has increased dividends at an annual rate of 7.4%. Fortis stock is currently trading at $53.6 indicating a forward yield of 3.8%.

Toromont Industries

Another Canada-based Dividend Aristocrat is Toromont Industries, a company that provides specialized capital equipment in Canada and other international markets. Toromont Industries has two primary business segments that include CIMCO and Equipment Group.

The CIMCO business is involved in the design, engineering, installation, and after-sale support of refrigeration systems for the industrial markets. The Equipment business segment is involved in the sale, rental, and service of mobile equipment for Caterpillar and other manufacturers.

Toromont has increased its dividend payments for 30 consecutive years. In the last five years, it has increased dividends at an annual rate of 12.5%. Toromont stock is currently trading at $89.4 indicating a forward yield of 1.4%.


Atco is Alberta’s largest natural gas distribution company and is an ideal pick for investors with a low-risk appetite. It has a diversified base of cash-generating assets including power plants, electric power lines as well as hydrocarbon storage facilities.

Atco has 15 commercial real estate properties, 90,000 square feet of industrial property, and 315 acres of land. As its earnings are regulated, you can expect Atco’s cash flows to be predictable. The stock is trading at a depressed valuation with a price to book ratio of just 1.15x.

Atco has increased its dividend payments for 26 consecutive years. In the last five years, it has increased dividends at an annual rate of 13.5%. Atco stock is currently trading at $40.8 indicating a forward yield of 4.4%.

Thomson Reuters

One of the best-performing stocks on the TSX is an information service provider. Thomson Reuters has clients across industries including law, tax, accounting, financial services, and healthcare. Since the start of 2012, the stock has returned 265%.

The company has high operating leverage. While sales were up 2% in Q4 of 2020, its EBITDA soared 33% to $525 million, indicating a margin of 32.5%. In 2020, its adjusted EBITDA rose by 33% to $2 billion.

Thomson Reuters has increased its dividend payments for 26 consecutive years. In the last five years, it has increased dividends at an annual rate of 3.5%. Thomson Reuters stock is currently trading at $109.31 indicating a forward yield of 1.9%.


Canada’s energy giants

In the last year, energy stocks have been under the pump. This has increased the dividend yields of several companies making them attractive to the income investor. Here, we look at three such energy stocks that have strong fundamentals.


Enbridge is a midstream energy giant that has generated steady earnings across business cycles. It’s involved in the transportation and distribution of crude oil and natural gas. Its fee-based business insulates the company from fluctuations in commodity prices.

Enbridge was in fact one of the best-performing energy companies in 2020. ENB stock has a forward yield of 7.4% and the firm has increased dividends at an annual rate of 10% since 1995.

Enbridge said it expects to place $10 billion of projects into service this year which will help it increase distributable cash flows between 5% and 7% through 2023.

Pembina Pipeline

Another energy company that operates under a contracted model is Pembina Pipeline. In 2020, it generated $3.28 billion in EBITDA, indicating year-over-year growth of 7.2%. Pembina has increased dividends at an annual rate of 4.9% in the last decade and now sports a tasty forward yield of 6.7%.
Pembina ended 2020 with over $3 billion in liquidity and expects to generate around $3.3 billion in EBITDA this year. Its capital expenditure for 2021 is forecast at $785 million making it one of the top stocks given the recovery in oil demand, higher pricing opportunities, and increased volumes going forward.
Pembina stock is trading at an attractive valuation making it a top bet for income and contrarian investors.

TC Energy

TC Energy is also a pipeline company with a diversified base of operations. The energy infrastructure giant has increased payouts for 21 consecutive years and it increased dividends by 7.4% for 2021.

In 2020, the company generated $9.4 billion in EBITDA which was just $15 million lower than the prior-year period. Its comparable funds from operations (FFO) rose 4% to $7.4 billion last year.

TC Energy has a number of projects that will help it expand its natural gas infrastructure portfolio in North America. Further its ongoing capital expenditures will fuel dividend increases between 5% and 7% in the near-term.

TC Energy has a low payout ratio of below 40% which means its current yield of 6% is easily sustainable.


Banking companies

Another sector that was hurt amid the COVID-19 pandemic was banking. The rising risk of defaults and a low-interest-rate environment sent stocks of banking companies spiralling downwards.

However, Canada’s banking heavyweights are fundamentally strong and have survived multiple recessions including the financial crash of 2008-09.

Royal Bank of Canada

The Royal Bank of Canada is the second-largest Canadian company in terms of market cap. It is also one of the 15 largest banks in the world. Now, as interest rates might move higher, there is a good chance that RBC will be able to improve net interest margins and profitability going forward.

Analysts expect Royal Bank of Canada to increase its earnings by 23.3% in fiscal 2021 which means investors can hope for an increase in dividends once COVID-19 is brought under control.

In the fiscal first quarter of 2021, RBC reported a profit of $3.85 billion and easily beat Bay Street earnings estimates. The stock is now trading at $116.54 indicating a forward yield of 3.7%.

Bank of Montreal

Bank of Montreal is another major Canadian bank and is focused on gaining traction in the U.S. Its payout ratio is just 51.6% which makes its dividends sustainable and safe. The fifth-largest Canadian bank has a wide moat of revenue sources which means it is well diversified.

Bank of Montreal operates through 1,400 branches and 4,800 automated banking machines in Canada and the U.S. BMO stock is trading at $111.6 which suggests a forward yield of 3.8%.


Real Estate Investment Trusts

Real estate investment trusts or REITs are an excellent addition to your portfolio. If you want to gain exposure to Canada’s real estate market, you can invest in REITs without having to burn significant cash.

Here, we look at a few Canadian REITs that you can buy and hold over the long-term.

Summit Industrial Income REIT

Summit Industrial Income REIT is an open-end REIT that focuses on growing and managing a portfolio of light industrial properties in Canada. The REIT has properties that are generally single-story buildings. The properties are located close to major cities or key transportation links.

Summit Industrial REIT claims that light industrial properties generally derive returns that are near the top of Canada’s real estate industry. These properties are often associated with lower market rent volatility as well as lower operating costs, capital expenditures and maintenance costs too.

Summit Industrial stock is trading at $14.1, indicating a forward yield of 3.83%. Shares of the REIT are up 135% in the last five years, making it attractive to income and growth investors.

InterRent REIT

InterRent REIT is a growth-oriented company that aims to increase unitholder value and create a growing and sustainable dividend distribution model via the acquisition of residential properties.

It is focused on growing funds from operations per unit as well as net asset value per unit through its diversified portfolio. The REIT wants to provide unitholders growing cash distributions while maintaining a strong balance sheet and a conservative payout ratio.

InterRent stock is trading at $14.3, indicating a forward yield of 2.3%. Shares of the REIT are up close to 100% in the last five years.

Northwest Healthcare

The healthcare sector is fairly recession-proof making Northwest Healthcare a solid bet for your dividend portfolio. This REIT provides you exposure to international healthcare real estate infrastructure as it has a portfolio of 190 income-generating properties spread across 15.4 million square feet of gross leasable area.

These properties are located in major markets in Canada, Brazil, Australia, Europe, and New Zealand. The company’s properties are characterized by long-term indexed leases and stable occupancies.

Northwest Healthcare stock is trading at $13, indicating a forward yield of 6.2%. In the last five years, the stock is up 41%.

Killam Apartment

The final REIT on this list is Killam Apartment, a Halifax-based company. It is one of Canada’s largest residential landlords that owns, manages, and develops a portfolio of residential apartments valued at over $3 billion.

Killam is looking to enhance shareholder value and profitability by increasing earnings from existing operations, expanding its portfolio via accretive acquisitions, and developing high-quality properties in core markets.

Killam Apartment stock is trading at $18.7, indicating a forward yield of 3.64%. In the last five years, the stock is up 59%.


Telecom companies

Similar to utilities and healthcare, the telecom sector can also be considered recession-proof. Here, we look at two Canadian telecom giants that should be on your dividend watch right now.

Telus Corp.

Telus provides a range of telecom and information technology products and services to Canadians. The company operates through its Wireless and Wireline businesses. The Wireless segment generates sales from network revenue that include data and voice, as well as equipment sales from mobile technologies.

Telus has 16 million subscriber connections that include 9 million mobile phone subscribers, 1.8 million mobile connected device subscribers, 2.1 million internet subscribers, 1.2 million TV subscribers, 1.2 million residential voice subscribers, and over 700,000 security subscribers.

Telus stock is trading at $26.06, indicating a forward yield of 4.8%.

BCE Inc.

BCE Inc. is one of the largest telecom companies in Canada that offers subscription-based internet, wireless, wired, and TV services to millions of customers. It also operates one of the largest media businesses in Canada that include several radio and TV stations.

The demand for wireless connectivity surged ahead in 2020, as the work from home trend accelerated at a rapid pace. The COVID-19 pandemic acted as a tailwind for several tech and telecom firms and helped to increase an already impressive moat for BCE. BCE stock is trading at $56.74, indicating a forward yield of 6.2%.


Renewable energy

The renewable energy sector provides a great opportunity for investors looking to generate substantial returns. The demand for clean energy solutions is set to explode in the upcoming decade making this a really interesting sector right now.

TransAlta Renewables

TransAlta Renewables develops, owns, acquires, and operates several renewable power generation facilities. At the start of March, the company had a portfolio of 23 wind facilities, 13 hydroelectric facilities, and seven natural-gas generation facilities. Additionally, it also has a solar facility, and a natural gas pipeline.

In 2020, the company’s distributable cash flow stood at $1.15 per share or $306 million. It pays an annual dividend of $0.94 per share indicating a payout ratio of 82%. Last year, TransAlta increased EBITDA by 6% to $462 million and in 2021 it has forecast this figure between $480 million and $520 million.
TransAlta stock is trading at $19.03, indicating a forward yield of 5%.

Capital Power

Capital Power owns and acquires power generation facilities in Canada and the U.S. It generates electricity from multiple energy sources that include wind and solar. The company owns around 6,500 megawatts of power generation capacity at 28 facilities.

Since 2014, Capital Power has increased its dividends at an annual rate of 7% and expects this number to be similar in 2021 as well. Analysts expect the company to grow earnings at an annual rate of 15% in the next five years which makes its dividend yield of 5.7% safe and sustainable.

Further, in the last five years, Capital Power has almost doubled its market cap.

Algonquin Power & Utilities

Algonquin operates a portfolio of regulated and non-regulated generation, distribution, and transmission utility assets in North and Central America. The company sells power through its non-regulated renewable and clean energy power generation facilities. It owns and operates hydroelectric, wind, solar and thermal facilities and has a generating capacity of 2.1 gigawatts.

Algonquin serves around 306,000 electric connections, 371,000 natural gas connections and 409,000 water distribution connections. In 2020, the company increased EBITDA by 4% and it exited the year with $13.2 billion in assets, an increase of 21% year over year.

Algonquin stock is trading at $19.53, indicating a forward yield of 4%.

Brookfield Renewable Partners

Brookfield Renewable Partners has been a solid wealth creator for long-term investors. Since the start of this millennium, the stock has generated an annual return of 18%. The company owns a portfolio of renewable power generating facilities in North and South America, Europe, and Asia.
Its portfolio consists of 19,000 megawatts of installed capacity. Shares of Brookfield Renewables are trading at $49.65 which means its forward yield stands at 3.1%.


The final takeaway

We know it’s impossible to eliminate risk while holding dividend stocks in your portfolio. However, investors can look to lower risk and create a passive income stream by purchasing blue-chip dividend-paying companies.

In case you aim to earn a stable income, you need to focus on companies that have a wide economic moat, solid fundamentals, and cash-generating assets.

In case you allocate $5,000 in each of the above-mentioned stocks right now, you will generate $4,900 in annual dividend income. Further, if these companies increase dividend payouts at an annual rate of 5% in the next decade, annual dividend income will rise to $8,000 at the end of the forecast period.


This article was compiled by Hardbacon, which has designed a online broker comparator listing dozens of Canadian online brokers. Hardbacon also helps you save on savings accounts, chequing accounts, credit cards, robo-advisors, life insurance, mortgages and personal loans. If you want to go one step further and take control of your finances, you should download Hardbacon’s mobile app, which links to your bank and investing accounts, helps you plan for your financial goals, create a budget and invest better.

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