The most logical place to look for dividends for your clients is where they are most plentiful: the sectors that pay the largest amounts of dividends.

In Canada, that means bank stocks, first of all — by far, the largest source of dividend income. Based on current declared payment rates (see accompanying table), the indicated payments from bank stocks over the next 12 months are $11.6 billion.

The good news is that Canadian banks are looking attractive again after their stock prices dropped by 15% since April. This sector’s dividend payout ratio has dropped to 53%, earnings have been in a slowly rising trend in the past year and dividends have increased after two years of little change.

In addition to banks, there are another dozen industries that pay substantial amounts of dividends — between $500 million and $5.7 billion indicated for the next year.

Earnings’ and dividend payments’ rates of change give clues about where the gains are most likely to come from; they also suggest industries to avoid. Trends in the table are measured with six-month changes, which often provide a significant early signal.

Below is the outlook for dividend payments for these industries, in descending order of the dividends they pay:

> Banks. In addition to being the largest source of dividend payments, the bank subindex’s yield has risen 20% over the past six months. Whenever that has happened since 1980, banks have been at, or near, a good buying point. This indicator gave a false signal in early 2008, but 10 other signals have been accurate.

> Oil And Gas Exploration And Production. This may be an industry to avoid now. The dividend payout ratio on this subindex is 92%, industry earnings are dropping and stock prices have dropped this year. For several months this year, the indicated dividend rate was more than the subindex’s earnings. All in all, not a good combination.

> Telecommunications Services. The dividend payout ratio for these companies has been more than 80% of earnings since May, not leaving much room for increases. Earnings have dropped from a high in September 2010, but have risen slightly since July.

> Insurance. This sector’s challenge is volatile earnings — quite a change for a sector that used to be the essence of stability. As a result, this sector’s dividend payments have changed little over the past three years. Insurance stocks remain out of favour in the market; relative to the S&P/TSX composite index, the insurance subindex has dropped since 2007.

> Oil And Gas Storage And Transportation. Otherwise known as pipeline companies, these companies’ dividends have increased with cyclical regularity over the past half-dozen years. As a result, their payout ratio has climbed to 85% vs 60% in 2009.

Improved earnings will make the case for a significant increase in the payout. This industry has been a market leader, with its subindex rising by 69% from the mini-crash low in 2009.

> Integrated Oil And Gas. This industry is a source of steady dividends, and the rise in earnings in 2010-11 may produce more increases in dividend payments.

> Real Estate Investment Trusts. The only survivor of the crackdown in income trust taxation, REITs have had a big run since early 2009, doubling in price. However, increases in distributions have been getting smaller and the subindex has dropped since May.

> Gold-Mining Companies. These are the sleepers in the dividend world. The rising gold bullion price has lifted earnings within this industry, and dividends for the S&P/TSX gold subindex have almost doubled over the past year and a half. The payout ratio and yield are low, but there is potential for large increases.

> Media. This is an industry on a downtrend. After a yearlong rise, earnings have dropped again. In turn, dividend payments have dropped and the subindex has fallen below its 2009 low.

> Railways. They have the potential for dividend increases, thanks to the industry’s low payout ratio. But earnings growth since 2009 has been fitful. The low yield reflects the market’s view of the rails in the past few years as growth stocks.

> Diversified Financials. Headed by TMX Group Inc. and Onex Corp., this subsector has a record of volatile earnings, which are rising fast now. And with a low payout ratio, dividend increases are possible.

> Capital Goods. They offer a meagre dividend yield, but earnings have been rising quickly while dividend growth has been slow.

> Food And Staples Retailing. Earnings have increased, with a lot of variability along the way, since 2008. Dividends have not kept pace.  IE