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Investors seeking yield should look to dividend-paying stocks.

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That’s because they offer more downside support, says Stephen Carlin, vice-president and senior portfolio manager of Canadian equities at CIBC Asset Management. He manages the Renaissance Canadian Dividend Fund.

“Historical studies that have shown that dividend-paying stocks are less volatile in choppy markets,” he adds. “If the market believes dividends are sustainable, that’s the key to success in a yield strategy.”

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To determine whether a company’s dividend price is sustainable, calculate “the payout ratio, which is the percentage of net income that’s paid out to investors as a percentage of the total profits.” Then, compare that ratio to historical data as well as industry peers. You’ll also want to keep that number in mind as the stock moves.

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He prefers lower ratios, since those can remain in place even when markets are volatile. “If a bank stock in Canada yields about 4%, that dividend yield could remain in place [even if] volatility in the marketplace causes that stock to drop 10%.”

In that case, the dividend yield would actually rise slightly, going from 4% to 4.4%. That helps soften the blow of stock prices falling.

“So,” Carlin notes, “provided [investors] are comfortable with the sustainability of a stock’s dividend payment strategy, [dividend stocks] offer an element of downside support.”

Read: Alternatives a solution to high correlations

Further, government bonds have an average yield of 2% in the current low interest rate environment, while the average dividend yield is rising in Canada.

Read:

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Originally published on Advisor.ca

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