If you’ve played golf, tennis or baseball, you know about the “sweet spot” — the point of impact where maximum energy is transferred from your club, racquet or bat  to the ball, usually with pleasing results. Players often describe a shot from the sweet spot as a “clean hit,” because little energy or shock is transferred to the hands of the player.

Dividend investing also has a sweet spot: the combination of dividend yield and growth where the risk/return combination is just right.

Now, this optimal combination is somewhat subjective, depending on your need for income and appetite for risk. But we’ve found over time that a stocks with yields of 3% to 5%, combined with dividend growth of 5% to 15% per year, provide the optimal combination. When the yield is much higher than this, the risk of a dividend cut increases; when the yield is too low, the required dividend growth becomes too challenging.

The graph illustates the expected dividend growth and 2016 dividend yield of the 26 stocks currently held in the Dividend Champions portfolio. The area on the graph encircled with the green line can be described, in my view, as the sweet spot where attractive yields are combined with reasonable growth.

Inside this circle, stocks have a projected 2016 dividend yield of 3% to 5% with dividend growth between 5% and 20% over the 2 year period until the end of 2017. These companies mostly score well on our quality rankings with dividends that grow over time faster than the rate of inflation.

The Dividend Champions portfolio is positioned right in the middle of this group, with a dividend yield of 4% and dividend growth of 12% between 2015 and 2017. The bulk of the portfolio holdings also fall within the circle, including BCE Inc. (TSX:BCE, NYSE:BCE), Fortis Inc. (TSX: FTS, OTC: FRTSF), Inter Pipeline Ltd (TSX:IPL, OTC: IPPLF) and North West Co. Inc. (TSX: NWC, OTC: NWTUF).

Topping the growth pile for the next two years is Canadian National Railways (TSX: CNR, NYSE:CNI), with 32% dividend growth — but its dividend yield is only 1.8%. We are comfortable to accept the lower yield in exchange for a superior quality operation, sound balance sheet, abundent cash flow and faster growth.

How about our two holdings in the red circles, well outside the sweet spot? Let’s take a closer look at each.

In the circle to the left is Shawcor Ltd. (TSX: SCL, OTC: SAWLF), with a yield of only 2.2% and no expected dividend growth until the end of 2017. We explain why we’re holding onto this high-quality energy services company elsewhere in this issue, but long story short: we can accept the below-par dividend yield because we expect that strong growth will resume when energy markets enter a sustained recovery period.

The red circle to the right indicates our holding in InnVest REIT (TSX: INN-U; OTC: IPPLF) with an indicated yield of 7.6% but no growth in the distribution until the end of 2017. Despite the implied risk of a dividend cut in the next 12 months (as the high dividend yield may suggest), we’re comfortable that management is taking prudent steps to enhance the portfolio and improve the balance sheet, which will hopefully lead to dividend growth from 2018 onwards. InnVest remains a keeper.

The table overleaf lists the relevant dividend information for our current Dividend Champion holdings.