If you’re buying your first Canadian dividend stock and want one that will hold up in any market, you need a company that will continue to pay investors steadily regardless of whether the economy is booming, sluggish, or in full-blown slump. That means you should think more about reliability than excitement. So, before we dive into the first high-yield dividend stocks, let’s take a look at what investors might want to consider, and a perfect option on the TSX Today.
Considerations
Start by looking at the source of the dividend. A healthy dividend comes from consistent free cash flow. Investors want companies that make money every quarter on products or services that people always need: electricity, internet, groceries, bankingtransport or energy. Then check the track record. Any dividend stock can pay a dividend when times are good, but only the strongest can maintain or increase that dividend through rate hikes, recessions, and inflation spikes. Provide at least 10 years of continuous payments.
The payout ratio is another must-check. This tells you how much of the company’s profits go to dividends. Anything above 80% can be risky, especially if profits fall during a recession. A payout ratio of less than 70% leaves room for error and for dividend growth. Then look at the debt and interest coverage. High debt is not automatically bad, but becomes dangerous when borrowing costs rise. A quick check: If a company’s interest coverage ratio is well above three, it’s in safe territory.
Appreciation is also more important than most people think. Even a good dividend stock can disappoint if you pay too much. Look at the stock’s price-to-earnings ratio or price-to-cash flow ratio compared to its own 10-year average. If you buy below that long-term average, you get a built-in cushion. And don’t ignore the dividend growth potential. A 4% return today that grows 5% annually is better than a 6% return that stays the same. Over time, rising dividends mean rising earnings and usually rising stock prices.
Why RY works
Royal Bank of Canada (TSX:RY) is Canada’s largest bank by market value and one of the major players in North American banking. It offers personal and commercial banking, asset management, capital markets and insurance. Because the company is diversified across geographies and industries, it is less exposed to the ups and downs of one narrow niche.
Royal Bank reliably declares its quarterly dividend on common shares, most recently $1.54 per share for the next payout. According to recent data, the forward dividend yield is around 2.8%, with the payout ratio at a modest 45% of earnings. This leaves room for stability and growth rather than the company living hand-to-hand to keep paying the dividend. Furthermore, the bank has a history of increasing its dividend at a compound annual growth rate of around 6%.
There are a number of reasons why dividend stocks work in any market. The banking system is a fundamental part of the economy. Whether the market is up, down or sideways, people still need banking services, and that provides a foundation of stability. If there is further diversification, if one segment slows down, other segments may catch up. This reduces the chance of major disruptions. All this ensures that dividend stocks can continue to grow and investors can continue to pay.
No inventory is perfect, so there are a few items to keep an eye on. Banking, for example, is cyclical. Therefore, credit losses, economic downturns, regulatory changes and interest rate fluctuations can hurt profits and thus the bank’s ability to increase dividends. Even large, diversified banks are not immune to global economic shocks or domestic crises.
Silly takeaway
If I were to pick a Canadian dividend stock to hold through various market regimes, RY would be high on the list of ‘core holdings’. It checks many boxes for stability, moderate payouts, growth potential, diversification, and a proven track record. It may not deliver the highest yield in the universe, but for a dividend stock you can hold without worrying too much about a payout cut during tough periods, it works.
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