Every Wednesday, we publish our “Investor Toolkit” series on TSI Network. Whether you’re a beginning or experienced investor, these weekly updates are designed to give you specific investment advice. Each Investor Toolkit update gives you a fundamental piece of strategy, and shows you how you can put it into practice right away. Today’s tip: “Dividends can produce as much as a third of your total return over long periods.” Dividend stocks rarely get the respect they deserve, especially from beginning investors. That’s because a yearly 2% or 3% or 5% dividend barely seems worth mentioning alongside possible yearly capital gains of 10%, 20% or 30% or more. But dividends are far more reliable that capital gains. A stock that pays a $1 dividend this year will probably do the same next year. (It may even raise the rate to $1.02). Dividends from Canadian companies come with a tax credit, to reflect corporate income taxes. This cuts your tax rate. (Note: the credit is non-refundable and can only offset income taxes owed. But you can transfer it to your spouse under certain conditions.) A couple of decades ago, you could assume that dividends would contribute up to a third of your long-term investment returns, even without the tax-cutting effects of the dividend tax credit. In the early years of the past decade, dividend yields were generally too low to provide a third of investment returns. But since yields have moved up and interest rates remain low, it’s realistic to assume they will again contribute as much as a third of your total return.
