Why chasing high returns is the fastest way to lose money

For many Canadians, dividend investing is one of the best ways to build real wealth over the long term. When you own high-quality companies that pay reliable dividends, you continue to receive consistent cash flow, which you can immediately reinvest back into the market and put the compounding capital to work.

Over the decades, that continually increasing income stream can help even modest investments yield significant sums. The key for investors, however, is to ensure that the companies you buy for the long term are reliable, established companies with reliable or defensive operations.

And while that may seem logical at first glance, when it comes to actually selecting individual stocks, many investors fall into the trap of chasing the highest returns they can find.

A stock that offers investors a 10% yield looks much more attractive at first glance compared to a 4% yield. However, that is exactly the pitfall. High returns are almost always a red flag for the market.

Dividend yields rise when stock prices fall. So often, a high yield stock that continues to trade cheap and struggles to recover has a dividend that the market believes is unsustainable.

This happens all the time when a company’s dividend becomes unsustainable. Last year, for example, earlier B.C (TSX:BCE) ultimately cut its dividend by 56% in May, the stock’s yield had risen to over 13%.

Therefore, the most important thing about dividend investing is not the return it offers today. It’s about the sustainability of that dividend in the short and long term. You need to assess whether the company will continue to pay that dividend for years and ideally grow it.

So if you’re looking for a high-quality dividend stock to buy today, here are two high-quality picks.

Two of the best dividend stocks on the TSX today

Although BCE had to cut its dividend last year, the stock remains one of the best companies for dividend investors to buy and hold for the long term. Like one telecommunications shares, it generates billions in cash flow annually by providing essential communications services to Canadians.

However, the telecom sector has seen a period of significant investment over the past three years as companies rushed to build out their 5G and fiber infrastructure to stay competitive. This was a necessary move, but it also caused BCE’s free cash flow to become negative for several years, necessitating a dividend cut to improve the company’s sustainability going forward.

Now, though, with almost all of that heavy capital investment behind it, and with a much more sustainable dividend going forward, BCE is once again one of the best dividend stocks to buy now.

Furthermore, not only does it offer an attractive yield of 5% today, but with the stock now in a much stronger position than it was a year ago, it also has the potential to start increasing its dividend annually again.

In addition to BCE, Royalties owned (TSX:FRU) is another high-quality dividend stock that investors can buy with confidence today.

The energy stock has a simple, low-risk business model, making it ideal for dividend investors. It simply collects royalties from other energy companies that use its land to produce oil and gas.

Therefore, it continuously generates cash flow without having to spend money on capital expenditure itself. Furthermore, the stock consistently aims to keep its payout ratio between 60% and 80% of funds from operations to ensure it remains sustainable. And right now, Freehold is offering investors a yield of over 6.2%.

So if you’re looking to boost your passive income with reliable, high-yield dividend stocks, there’s no doubt that Freehold is one of the best.