5 top Canadian dividend stocks to invest in

Canadian dividend stocks

Here are 5 Canadian dividend stocks we recommend holding in your portfolio

One of the key points in our three-part investment advice is to invest mainly in well-established dividend-paying stocks. Successful investors pay a lot of attention to dividend yields from Canadian dividend stocks. Dividends can contribute up to a third of your long-term investment returns. That’s even before the tax savings associated with the Canadian dividend tax credit.


When to trust your dividends

“One of the best ways to judge whether a company will keep paying its dividend, or even increase it, is the dividend payout ratio. This simply measures what portion of a company’s earnings are allotted to paying dividends. If a company keeps its payout ratio fairly steady, say at 7% of earnings, and its earnings grow…”
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The dividend tax credit offered to Canadians can greatly increase your investment returns

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

This means that dividend income will be taxed at a lower rate than the same amount of interest income. Investors in the highest tax bracket pay tax of around 30% 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%.

What Canadian dividend stocks offer investors

Dividends are far more reliable than capital gains. A stock that pays a $1 dividend this year will probably do the same next year. In addition, top dividend-paying stocks like to ratchet those payments upward—hold them steady in a bad year, and raise them in a good one. That also gives you a hedge against inflation.

For a true measure of stability, we focus on those companies that have maintained or raised their dividends during economic downturns. That’s because 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.

5 Canadian dividend stocks worth investing in

We still think investors will profit most—and with the least risk—by buying shares of well-established, dividend-paying stocks with strong business prospects.

These are companies that have leading positions in healthy industries. They also have strong management that will make the right moves to remain competitive in a changing market.

Stocks like these give investors an additional measure of safety despite today’s volatility. And the best ones offer the attractive combination of a moderate p/e (the ratio of a stock’s price to its per-share earnings), steady or rising dividend yields (annual dividend divided by the share price) and promising growth prospects.

Here are some of the stocks we think meet those criteria:

  1. Bank of Nova Scotia, Toronto symbol BNS
  2. Canadian Pacific Railway Ltd., Toronto symbol CP
  3. Imperial Oil Ltd., Toronto symbol IMO
  4. Loblaw Companies Ltd., Toronto symbol L
  5. Telus Corp.Toronto symbol T

Look for Canadian dividend stocks with consistency

One of the best ways of picking a quality Canadian dividend stock is to look for companies that have been paying dividends for at least 5 to 10 years. Companies can trump up quarterly earnings, issue press releases to appear to be making strong progress, but they cannot fake dividends. Dividends are cash outlays that an unsuccessful company could never produce. A history of dividend payments is one commonality that all the best dividend stocks have.

Dividend stocks are a sign of investment quality. Some good companies reinvest profit instead of paying dividends. But fraudulent and failing companies hardly ever pay dividends. So if you only buy stocks that pay dividends, you’ll automatically stay out of almost all the market’s worst stocks.

Are you already investing in any of these Canadian dividend stocks? How have they performed? Share your experience with us in the comments.

This post was originally published in 2016 and is regularly updated.

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