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As interest rates climb higher to combat inflation, investors can look to dividend stocks for stability. 

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Colum McKinley, senior portfolio manager with CIBC Asset Management, said even in a rising rate environment, the characteristics of high-quality dividend-paying stocks remain the same.

McKinley looks for strong companies with solid fundamentals that are focused on generating long-term returns for shareholders. 

He also wants companies that generate excess cash flow, he said, which they can use to pay dividends or to buy back shares after they’ve reinvested in the business and paid down debt. Even in a rising rate environment, these characteristics remain true. 

At the moment, he likes the big Canadian banks.

Banks are well-capitalized businesses, which McKinley said allows them to do two things: weather any uncertainty in the near term, and return capital to shareholders in the form of dividends or share buybacks in the future.

Dividend yields for banks are currently about 4.5%, on average, and McKinley said over time that has consistently grown. So for investors looking for dividend income that will compound over time, the banks continue to be a great place, he said.

“The banks are going to continue to be a great source of dividend income and dividend growth over the coming years for Canadian investors.”

McKinley also sees potential in the energy sector, which he calls a “non-traditional” source of dividends.

Over the last three to five years, energy companies have shifted away from reinvesting capital into the ground, returning it to shareholders instead. For example, Canadian National Resources’ dividend is currently above 4%.

As the company generates excess cash flow, McKinley said it’s likely to continue growing its base dividend and returning excess capital to shareholders, making the company “exceptionally well positioned in a strong commodity environment.”

“If they maintain this discipline that we’re seeing, they’re going to be some of the fastest dividend growers in the Canadian marketplace,” he said.

This article is part of the AdvisorToGo program, powered by CIBC. It was written without input from the sponsor.