As the season of giving approaches, we are all in search of the perfect gift for our loved ones, without busting our budget. Regardless of age or preference, a monetary gift will always be in fashion and what better way to show your appreciation than by bestowing a gift that will continue to pay the recipient for years to come. In this article, I will share with you a few solid blue-chip dividend stocks (both Local and International) which you may consider gifting this year, along with a few tips on how to create your own dividend portfolio.

A dividend is a payment made by a corporation to its shareholders, usually as a distribution of profits. When a corporation earns a profit or surplus, it may either re-invest it in the business (also known as retained earnings), or it may distribute it to the shareholders by means of dividends. Larger, more mature Companies tend to issue dividends while retaining a portion of its earnings. Typically dividends are paid quarterly.

Locally, stocks such as Scotia Group Ja (SGJ) and Carreras Ltd (CAR) are historically known for their consistent dividend payments. In the case of SGJ, the company recently announced a dividend payment of $0.40 per share (consistent with last three quarterly dividend paid) which is scheduled to be paid on January 13, 2014 for shareholders on record as at December 18, 2013. Based on Monday, December 02, 2013 close price of $19.99 per share, the dividend yield is approximately eight per cent. Last year, the group paid out $4.7 billion in dividends, representing a 46.25 per cent payout ratio, and has steadily increased their dividend payments year over year at an average rate of 8.3 per cent since 2003.

Carreras’ currently trading near its 52-week low at $36 per share boasts a dividend yield of 19 per cent. Not including extraordinary dividends paid, the dividend yield is still quite attractive at 13 per cent. Although the share price has declined considerably, down 28 per cent year to date, primarily due to Government’s imposition of the “smoking ban” in July, the company still has strong cash reserves and a healthy profit margin to maintain their dividend payments going forward. Also of note, the Company is expected to receive $1.7 billion, or $3.50 per share, in regards to a settlement with the Tax Audit & Assessment Department. The Government has allocated $912 million in its FY 2013/2014 budget to cover payments, which could potentially be used to fund a special dividend to investors amounting to $1.88 per share.

The Board of Directors of Carreras Limited declared an interim dividend of $1 per share payable on December 11, 2013 to shareholders on record as at November 20, 2013. The forward dividend yield at this lowered dividend payment would still be a compelling 11 per cent.

When it comes it International stocks, Coca-Cola Company is the very definition of a blue-chip stock. The Company has paid a quarterly dividend since 1920 and has increased dividends in each of the last 50 years. With a close price of US$40.08 per share (as of Monday), the dividend yield is 2.79 per cent. The annualised dividend growth rate for the last three years stands at 7.5 per cent and the payout ratio is approximately 53.6 per cent.

Dividend stocks play a vital role in your investment portfolio. Not only do they increase the potential for enhanced total return, especially in uncertain market environments, but they also aid in possible reduction of volatility, as compared to more growth-oriented stocks.

There are a few key points highlighted by the aforementioned stock picks which will assist you constructing your own dividend portfolio.

Diversification is paramount. Building a portfolio of ten to fifteen solid companies will help to fortify your returns. Diversifying based on industry will help to mitigate risks of lowered dividends when a specific industry gets hit. For example, while oil companies tend to pay high dividends, when oil prices fall, having a diversified portfolio will ensure that the income on the entire portfolio does not get affected.

Choose Companies with modest payout ratios. A payout ratio of 60 per cent or less will allow for more breathing room, especially in harsh economic conditions.

Choose Companies with a long history of raising their dividends. This ensures that the effects of inflation are minimized, thereby maximising your total return. A rising dividend is not just a signal that the company has a positive outlook for its future prospects, but also a factor that imposes discipline on the company by forcing it to make wise decisions about what to do with its cash.

Finally, it is important to realise the value of reinvesting your dividends. This one action can add a surprising amount of growth to your portfolio with minimal effort. I previously shared the following fact in an article written last year and I will share it with you again as it will never cease to amaze me: a single share of Coca-Cola bought for US$40 in the 1919 IPO with dividends reinvested is now worth US$9.8 million versus US$341,545 without dividends reinvested. In closing, I wish you all the Best for the Holidays and a Prosperous 2014.

Gillian Bernard is a wealth advisor from the wealth division of Stocks & Securities Ltd. Contact: gbernard@sslinvest.com