The stock market fluctuates day-to-day and even from month to month, making it essential to strategize well before jumping in and joining the bandwagon.
The bottom line, as an investor, is to make money and increase your wealth. It is all quite complicated out there with multiple options that look lucrative. There are growth stocks, and there is dividend investing. Investors need to understand which dividend stocks to invest in when going ahead with the latter option.
What Is dividend investing?
In this form of investment, investors choose to buy stocks of dividend-paying companies. Two things impressive about this form of investing are:
a. Consistent flow of income
b. Capital gains on a long-term basis
The cash flows are pretty predictable, which makes this investment low-risk. However, it is wrong to assume that dividend stocks are completely risk-free investments. It is advisable to seek professional advice if you’re not too sure about the stocks under consideration.
Dividend investment terms you should know
1. Dividend yield or forward yield “is expressed as a percentage, is a financial ratio (dividend/price) that shows how much a company pays out in dividends each year relative to its stock price.”
2. The payout ratio is a percentage metric calculated as the dividend yield divided by its net earnings. A lower payout ratio means more reinvestment power for the firm.
3. Capital Gains are the increase in the prices of the company’s stocks and the dividends. A strong capital gain is a healthy sign for investing in the company’s stock.
4. EPS or Earnings Per Share is the money the firm makes for every outstanding share. The figure is arrived at by dividing the firm’s net income by total outstanding shares. Firms that have positive growth in EPS are suitable for investments.
5. Price to Earnings is a metric used for gauging stock valuation and is calculated as the price of a stock divided by the EPS. When this ratio is high, it means that the stocks are expensive while when the ratio is low compared to peers, it suggests the stock is undervalued.
Points to Know When Choosing Dividend Stocks for Investments
1. A stock with a high dividend yield, while attractive, might not always be the right stock to invest in. A high yield is a factor to consider, but more importantly, investors need to look at the reasons behind the high or low dividend yields of a firm. It is advisable to go in for stocks with lower yields but with consistent and sustainable payouts compared to stocks that have momentary high yields and lack consistency.
2. Dividend payouts can be stopped or cut down by the firm. Thus, investors need to be aware that this investment is not always compulsory or guaranteed. Firms may decide to pay off their debts or invest in other programs from the profits, or they may be incurring negative profit margins, thereby slashing or suspending dividend payouts.
Here are a few Canadian dividend stocks you can consider to buy in May 2021.
Canadian Utilities Limited
Canadian Utilities Limited is one of the leading energy infrastructure companies in Canada. With assets valued at $20 billion, the corporation is involved in the transmission and distribution of electricity, natural gas, and international electricity operations. The company is also engaged in energy infrastructure and retail energy.
Canadian Utilities primarily operates in Alberta – north and central east, and Yukon and is known for its excellence in safety and quality services. It has also been offering sustainable growth to its shareholders.
It is noteworthy that the company has been making dividend payouts successfully for the last 48 years. Further, in the last five years, the dividend has increased annually at a rate of 9.6%.
With a forward yield of 5.3%, the stock is currently trading at $33.3. It is a good dividend stock to invest in because companies in the utility sector are usually recession-proof. After all, consumers will consume electricity and make payments, irrespective of whether there is a pandemic or rising unemployment.
Sienna Senior Living
Markham-based Sienna Senior Living is a senior housing and LTC services company in operation for the past 49 years, with most of its facilities and retirement residences in Ontario and British Columbia. Valued at a market cap of $990.17 million, the company did face fiscal losses in 2020 due to a drop in the occupancy rates that can be attributed to the pandemic.
The company shares have grown by 6.23% year to date. The noteworthy factor is that government-guaranteed cash flows back to the company. At the $14.77 share price, the dividend yield is at a respectable 6.34%.
Extendicare operates in the retired and senior housing space too. It is based in Markham and is known for its superior service quality as a Canadian senior care provider. It has been operating in this niche for the past fifty-three years with a strong foothold in the industry.
As a result, the company did pretty well during the coronavirus outbreak, with a 7% increase in revenues at the end of December 2020 vis-a-vis 2019. The share price is at $7.83 per share, while the dividend payout is at 6.13%.
Another Canadian dividend stock that you can consider is Toromont Industries, a manufacturer of specialized capital equipment. The company sells in Canada and other international markets. It has two core areas of operation – one is the CIMCO business involved in making, selling, and providing after-sales support for industrial refrigeration systems, and the other is the Equipment Group.
The company has been paying dividends for the last 30 years. In the last five years, there has been an increase in dividends to the tune of 12.5% annually. The shares are priced at $89.4 per share with a yield of 1.4%.
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Since 2012, the company has reported high operating leverage with EBITDA at $525 million at the end of Q4 in 2020. The dividend payouts have been increasing for the last 26 consecutive years. Over the last five years, the dividends have increased at a rate of 3.5%.
Dividend stocks are not risk-free but lowering risks is possible by choosing the right stocks to invest in. It is good to be informed and speak to a professional before making investment decisions.