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A good place to start for Canadians seeking income, stability and growth in their portfolios is to focus on selecting stocks that have track records of consistent and reliable dividend distributions.damircudic/iStockPhoto / Getty Images

When it comes to investing in a diversified portfolio of Canadian equities, there are usually two choices: a total return Canadian equity portfolio, or a Canadian equity dividend portfolio that generates considerably higher income.

An income-focused equity portfolio offers a host of compelling advantages, starting with the fact that high-dividend-paying stocks often outperform equities that pay few to no dividends.

Consider that since its inception in April, 2011, the iShares S&P/TSX Composite High Dividend Index ETF XEI-T has produced total returns of 113.6 per cent, besting the total returns of the S&P/TSX Composite Index of 106 per cent. Many actively managed dividend portfolios have done even better than this passive ETF. Over the past 30 years, dividends have accounted for 45 per cent of the total return from the Canadian equity market.

Nevertheless, despite a considerable history of high dividend payers outperforming low dividend payers, this trend has reversed in the past year, in part because of rising interest rates and better fixed income returns. Over the past 12 months, the XEI has lost 3.7 per cent, while the S&P/TSX Composite Index has produced positive returns of 1.6 per cent.

This signals that there is now plenty of value in high-dividend-paying stocks, and that it’s a good time to buy high-yielding, high-quality names.

For those seeking income, stability and growth in their portfolios, a starting point is to select stocks that have track records of consistent and reliable dividend distributions. A focus on the safety of the dividends ensures that the payout ratio – the proportion of earnings a company pays its shareholders in the form of dividends – is prudent and well within the company’s normalized earnings potential.

Investing in stable dividend-paying stocks also aligns well with a disciplined, long-term investment approach. The focus on companies with a history of consistent dividend payments encourages investors to adopt a patient outlook and avoid making impulsive decisions based on short-term market fluctuations.

High-quality dividend-paying stocks also tend to be considerably less volatile than non-dividend-paying stocks. As a result, these dividend-paying companies can help cushion the impact of market fluctuations.

The ability to pay reliable dividends also suggests that a company is mature and consistently generates positive cash flow. This is a sign of a stable, well-managed business.

A focus on Canadian equity adds another layer of stability to a portfolio. The Canadian economy has historically shown resilience, even during global economic downturns. By investing in high-quality Canadian companies with a history of steady dividends, investors gain exposure to businesses that are often well positioned to weather economic storms. This stability is further enhanced by the country’s strong regulatory framework, sound financial institutions and well-developed capital market, which collectively contribute to a favourable investment environment.

While the primary objective of investing in these companies is to generate a steady income through dividends, many of the companies that consistently pay dividends in Canada also exhibit solid growth prospects. This dual benefit allows investors to enjoy the best of both worlds – regular income, and the potential for wealth accumulation over time.

A Canadian dividend portfolio can also help investors achieve a properly diversified investment strategy. By selecting dividend-paying stocks from various sectors – such as financials, utilities, telecommunications and consumer goods – investors can spread their risk across different industries. While the U.S. market also has plenty of dividend-paying sectors, Canadian stocks have much higher yields, on average. The S&P 500 currently yields less than half of the 3.3-per-cent yield of the TSX Composite.

A focus on risk mitigation shouldn’t stop here, though. At Goodreid, where I am senior vice-president and Canadian portfolio manager, we believe that successful investment portfolios should invest in high-quality companies, with strong balance sheets and impressive profitability. And in order to benefit from a margin of safety, securities should be purchased when they are temporarily out of favour, or mispriced. This dual focus on quality and attractive valuations is sure to reduce company-specific risk and maintain an emphasis on preservation of capital.

The tax advantages associated with Canadian dividends make this type of investment portfolio even more attractive. In Canada, eligible dividends receive preferential tax treatment, resulting in potentially lower tax liabilities.

If you agree with the merits of investing in a high-income, low volatility Canadian equity portfolio and would like to add more yield to your own investments while reducing volatility, a good place to start is by considering investments in three stocks that we currently own: TC Energy TRP-T (7.7-per-cent yield); BCE BCE-T (6.9 per cent); and TD Bank TD-T (5 per cent). These are all high-quality companies, with durable economic moats and impressive dividend yields.

By harnessing the stability of Canadian equities and the reliability of dividend-paying stocks, investors can build resilient and prosperous portfolios that stand the test of time.

Robert Gill is senior vice-president and Canadian portfolio manager at Goodreid Investment Counsel Corp.

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