How To Choose Stocks For Your Defensive Dividend Portfolio

The U.S. market has been led by the bull for pretty much 10 consecutive years. So, it’s better to take a more defensive stance to prepare for attacks from the bear. A core component of a defensive portfolio is it can utilize conservative dividend stocks as its foundation.

Here are some tips for choosing your foundation conservative dividend stocks.

Earnings or Cash Flow Stability

Healthy dividends are paid from earnings or cash flow. So, stable earnings or cash flow generation improve the dividend safety of a stock.

Typically, utilities, REITs, the big Canadian banks, the big Canadian telecoms, and energy infrastructure stocks are good places to search for businesses that generate stable earnings or cash flow.

Dividend Safety

When checking for dividend safety, the first 2 things to look at are the payout ratio and dividend track record of the company. Typically, the lower the payout ratio, the safer the dividend.

However, certain industries like REITs and utilities tend to have higher payout ratios. So, it’s best to compare a company’s payout ratio to that of its industry peers.

For instance, Royal Bank of Canada (TSX:RY)(NYSE:RY) has a rock-solid dividend track record. Its conservative payout ratio below 50% aligns with that of the industry. The payout ratio gives a big buffer to withstand future crises.

Enbridge‘s (TSX:ENB)(NYSE:ENB) payout ratio will be about 67% this year, as it will pay out about $6 billion of dividends and generate roughly $8,900 of distributable cash flow based on company’s March estimates…

Unfortunately , I have maxed the word limit for this excerpt. But you can read the full Seeking Alpha article here: How To Choose Stocks For Your Defensive Dividend Portfolio

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Disclosure: As of writing, I’m long ENB.

Disclaimer: I am not a certified financial advisor. This article is for educational purposes, so consult a financial advisor and or tax professional if necessary before making any investment decisions.

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