Canadian Dividends are Even More Valuable Than Many Investors Realize

Many investors don’t realize how Canadian dividends receive an extra benefit for Canadian investors holding shares of Canadian companies. To get the most from your Canadian dividend-paying stocks, make sure to understand the rules of the Canadian dividend tax credit

Canadian dividend stocks are publicly traded Canadian stocks that pay a dividend. Dividend stocks from Canada have added appeal because their dividends receive special tax benefits—U.S. dividends are not eligible for these tax benefits.

At TSI Network, we think Canadian dividends are one of the best features of high quality Canadian company shares.

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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Canadian dividends qualify for a tax credit

Canadian taxpayers who hold stocks with Canadian dividends are eligible for the dividend tax credit. 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 29% on dividends, compared to 50% on interest income—investors in the higher tax bracket pay tax on capital gains at a rate of 25%.)

An example of the dividend tax credit for Canadian dividends

If you earn $1,000 in dividend income and are in the top 50% tax bracket, you will pay about $290 in taxes.

That’s a bit more than capital gains, which offer tax-advantaged income as well. On that same $1,000 in income, you will only pay $250 in capital gains taxes.

It’s a lot better than the roughly $500 in income taxes you’ll pay on the same $1,000 amount of interest income.

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 a significant amount of the market’s total return over the next few decades.

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

When you add in the security of stocks that have dividend records going back many years or decades—and include the potential for tax-advantaged capital gains on top of dividend income—Canadian dividend stocks are an attractive way to increase profit with less risk.

You need to own shares in dividend-paying Canadian companies to receive a tax credit

If you stick with top quality high dividend paying stocks, the income you earn can supply a significant percentage of your total return—as mentioned, as much as a third of your gains. And at the same time, dividends are more dependable than capital gains as a source of investment income.

Good dividend stocks are a valuable component of any sound investment portfolio. Above all, for a true measure of stability, focus on stocks that have maintained or even raised their dividends during economic or stock-market 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 also provide an attractive mix of safety, income and growth.

A track record of dividend payments is a strong sign of reliability and a strong indication that investing in that stock could be profitable for you in the future.

Bonus Tip: Canadian bank stocks pay some of the best Canadian dividends

Canadian bank stocks have always been among the best income-producing securities. We’ve long recommended that all Canadian investors own two or more of the Big Five Canadian bank stocks—Bank of Nova Scotia, Bank of Montreal, CIBC, TD Bank and Royal Bank.

Banks remain key lower-risk investments for a portfolio. As well, the big five Canadian bank stocks all have long histories of annual dividend increases.

We believe Canadian bank stocks are still well positioned to weather downturns in the Canadian economy, contrary to pessimistic forecasts on the banks’ prospects from some in the business media. They trade at attractive multiples to earnings and continue to raise their dividends.

Do you reinvest the dividends you receive from reputable companies back into that company for more shares, or do you invest those dividend payments in other ways?

For many investors, Canadian dividend stocks are some of the best investments you could make. Is there something about them that doesn’t fit with your investing strategy?


  • It would be nice to know how much of an increase in percentage a dividend tax credit gives. If a Canadian company gives 3% dividend, what would the end yield be to a Canadian investor after the credit? 3.6%?

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