The Best Dividend Stocks: Canada Provides Added Benefits to boost your returns

best stocks with dividends

Are you looking to invest in the best dividend stocks? Canada offers a tax credit on Canadian dividend stocks, and that just adds to their value in a successful portfolio

Do you want to find and invest in the best dividend stocks? Canada provides an even greater opportunity for dividend investors because of the dividend tax credit.

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


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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Boost your portfolio returns by holding the best dividend stocks: Canada offers dividend tax relief, so learn how to invest in dividend stocks with these five suggestions

Investors in the highest tax bracket pay tax of 29% on dividends, compared to about 50% on interest income. At the same time, investors in the highest tax bracket pay tax on capital gains at a rate of roughly 25%.

Before buying the stock, it is important to determine not just if a stock pays a dividend, but whether it will keep paying it. Here are five tips to help you assess the sustainability of a company’s dividend:

  1. Look for companies with long-term success. These companies are the most likely to keep paying and increasing their dividends.
  2. The current financial health of a company. If a company is doing well, has done so consistently, and shows signs of growth, these factors are indicative of stocks that will keep paying a dividend.
  3. A company’s current dividend. If a company currently offers a healthy dividend, this is a good sign of its potential to continue offering a steady dividend.
  4. How does the company manage its relationships with investors? If there is a favourable relationship, and the company fits the other qualifications listed above, it may be a good dividend-paying stock to invest in.
  5. Note the competition. Look for companies with a strong hold on a growing market and a unique product or service that cuts its competition.

An example of the dividend tax credit in action 

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.

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 best dividend stocks: Canada’s tax credit makes dividends even more reliable than capital gains

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.) As well, some investors forget about the wonderful effects compounding can have on your portfolio. As a quick refresher, compound interest is earning interest on interest; that can have an enormous ballooning effect on the value of an investment over the long term and lift the overall returns on your portfolio. Reinvested dividend payments act in a similar fashion.

Stock prices rise and fall, so capital losses often follow capital gains, at least temporarily. But companies like to ratchet their dividends upward—hold them steady in a bad year, raise them in a good one. That gives you a hedge against inflation.

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.

Superior long-term investment gains can come from the best dividend stocks

We think that Canadian dividend stocks rarely get the respect they deserve from investors.

If you stick with top-quality stocks with high dividends, the income you earn can supply a significant percentage of your total return. That can be 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.

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.

To summarize then, when it comes to investment safety, a long history of steady dividends is worth looking for.

Are dividends a major factor in your decision to buy a stock? Why or why not?

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