Do you know all of the benefits of dividend paying stocks? Canada provides a big tax break, for example

Here’s a quiz to test your knowledge of dividend-paying stocks. Canada gives Canadian residents with dividend stocks a tax credit, but do you know what the tax savings are? Plus more quiz questions.

Savvy investors continue to focus on dividend stocks—and the best of these dividend stocks respond by doing their utmost to maintain, or even increase, their payouts. Even if you don’t need current income from your portfolio, we still think you should invest in the top Canadian dividend stocks.

How much do you know about dividend-paying stocks? Canada offers some benefits to investors that you may not know about. Test your knowledge of dividend paying stocks with some questions below.

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A. Where should you not hold dividend-paying stocks if you have other types of stocks, bonds and so on?

  1. In an RRSP
  2. In a RRIF
  3. In a TFSA
  4. All of the above

You are correct if you answered 4.

Canadian taxpayers who hold Canadian dividend stocks can be eligible for the dividend tax credit in Canada. This dividend tax credit is available on dividends paid on Canadian stocks held outside of an RRSP, RRIF or TFSA—and it will cut your effective tax rate.

B. Canadian stocks qualify for a dividend tax credit, which lets investors in the highest tax bracket pay tax at a rate of approximately:

  1. 25%
  2. 29%
  3. 50%
  4. None of the above

You are correct if you answered 2.

This means that dividend income will be taxed at a lower rate than the same amount of interest income. For example, investors in the highest tax bracket pay tax of around 29% on dividends, compared to 50% on interest income. At the same time, investors in the highest tax bracket pay tax on capital gains at a rate of about 25%.

The Canadian dividend tax credit is actually split between two tax credits. One is a provincial dividend tax credit and the other is a federal dividend tax credit. The provincial tax credit varies depending on where you live in Canada.

A couple of decades ago, you could assume that dividends would supply up to about one-third of the stock market’s total return. Dividend yields are generally lower today than they were a few years ago, but it’s still safe to assume that dividends will continue to supply perhaps a third of the market’s total return over the next few decades.

So apart from the Canadian dividend tax credit giving you a major tax-reducing opportunity, dividends can supply a big part of your overall long-term portfolio gains.

C. The highest-yielding dividend stocks are:

  1. Always safe and worth investing in
  2. Potentially risky because a very high yield could be a danger sign
  3. Incredibly hard to find but worth every penny

You are correct if you answered 2.

Investors should avoid judging a company based solely on its dividend yield. That’s because a high yield can sometimes be a danger sign rather than a bargain. For example, a dividend-paying stock’s yield could be high simply due to the fact its share price has dropped sharply (because you use a company’s share price to calculate yield) in anticipation of a dividend cut. That’s why we recommend that you look beyond just dividend yield when making investment decisions, and look foremost for companies that have also established a sound business and a history of building revenue and cash flow.

D. The best dividend companies to invest in:

  1. Have a history of paying a dividend for at least 5 to 10 years.
  2. Borrow heavily to keep paying a dividend when they are losing money.
  3. Offer dividend reinvestment programs, but are not stocks that otherwise have appeal.

You are correct if you answered 1.

Look for companies that have been paying dividends for, ideally, at least 5 to 10 years when investing in dividend stocks. Companies can trump up quarterly earnings, issue press releases to appear to be making strong progress, but they cannot fake dividends.

Some good companies reinvest their profits instead of paying dividends, but fraudulent and failing companies are hardly ever dividend-paying stocks.

Creative accounting can produce false impressions of prosperity and hide financial problems. But accounting can’t create cash for this year’s dividend, let alone conjure up a history of past dividends.

For a true measure of stability, focus on companies that have maintained or raised their dividends during economic and stock market downturns. These firms leave themselves enough room to handle periods of earnings volatility. By continually rewarding investors, and retaining enough cash to finance their businesses, they provide an attractive mix of safety, income and growth. The best Successful Investor dividend stocks respond to tough economic times by doing their best to maintain, or even increase, their payouts.

Stick to dividend payers that meet our Successful Investor criteria and you’ll avoid most of the market’s greatest disasters.

Use our three-part Successful Investor approach to pick the best dividend-paying stocks:

  1. Hold mostly high-quality, dividend-paying stocks.
  2. Spread your money out across most if not all of the five main economic sectors: Manufacturing & Industry, Resources & Commodities, Consumer, Finance and Utilities.
  3. Downplay or stay out of stocks in the broker/media limelight.

Some investors believe in the Dividend Irrelevance Theory, which indicates that a company’s willingness to pay a dividend should not impact its stock price. What are your thoughts on this theory?

Are you constantly on the lookout for top dividend-paying stocks? Where do you go to find the best stocks for your portfolio?


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