As you may know, I’ve been investing in stocks for about 13 years. I surely love it when my stocks provide outperforming returns. Of course, there are laggards, too.
What more can stock investing be about if it’s not just about returns? Every stock investor wants to get rich, right?
I discuss below why earnings quality and dividend income could be important to you.
Since I delved into growth investing, including in small caps, I’ve become more deeply appreciative of stocks with underlying businesses that have superb earnings quality.
I hate to break the news. Stocks with high earnings quality won’t give you the greatest returns. However, they give you something else — a defensive, low-risk holding. These kinds of stocks should provide reassurance to any stock investor when the macro environment is in turmoil.
The more conservative you are as a stock investor, the bigger percentage of these types of stocks you should hold in your stock portfolio.
The graph below provides a representation of Fortis (TSX:FTS)(NYSE:FTS) stock being a company with quality earnings. It clearly shows its earnings stability through economic cycles. Over the last 20 years or so, even when the utility experienced a setback, it would more than recover its earnings by the following year.
Fortis produces quality earnings because it has largely regulated transmission and distribution assets. These assets generate predictable returns. However, because it’s regulated, its returns are also capped in a way.
That’s why, despite Fortis’s quality and defensiveness, investors still need to buy it at a good valuation to get decent returns. When should you buy dividend stocks like Fortis? I don’t want to digress. So, that’s for a future article.
Some investors might care more about current income than total returns. Talk to retirees or people who lost their jobs.
The best five-year GIC and CD rates are 1.8% and 1.25%, respectively. I chose five years because I don’t recommend buying and selling stocks quickly. You can’t go wrong by aiming for a holding period of five years before you put money in the stock market.
Typically, you can get safe yields of 3-4% in the stock market. Some reasonably priced dividend stocks around this range include Fortis, Pepsi (NASDAQ:PEP), Royal Bank of Canada (TSX:RY)(NYSE:RY), and STORE Capital (NYSE:STOR).
You’ll notice I own all of these stocks at the time of writing. Please note I bought them all at lower prices than now. I can disclose that I bought Fortis and Pepsi within the last month and RBC and STORE Capital during the pandemic market selloff.
Please note I’m not recommending you to go buy them now. It’s simply a list you can explore and research more about to potentially earn dividend income from.
Before buying a stock, look at its earnings quality. If earnings are cyclical, you need to be extra careful about when to buy.
At different points in your life, you would care more about income than returns. Aside from that, I found over the years that no matter what type of stock investor you are, it’s reassuring to have solid dividend-growth stocks in one’s diversified portfolio. They especially provide solace in a market crash like the one we experienced in March 2020.
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I’d love to hear from you! Let me know if you found this article useful, have any feedback, or want me to write about certain stocks or stock investing topics.
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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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