Understanding the ins and outs of how to invest in dividend stocks in Canada will set conservative investors up for powerful returns without the tax on interest

At TSI Network, we feel that a long-term record of a stock paying dividends gives investors a measure of safety. Dividends, after all, are much more stable than earnings projections. More important, dividends are impossible to fake—either the company has the cash to pay them or it doesn’t. From a tax on interest (Canada) perspective, dividends are also an important part of maximizing your retirement income.

Here’s more on how to invest in dividend stocks in Canada so you can maximize your gains.

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Learn how to invest in dividend stocks in Canada to lower your taxes [and avoid the high tax on interest (Canada)]

Dividends don’t always get the respect they deserve, especially from beginning investors. Still, veteran conservative investors know that a dividend stock’s yearly 2% or 3% or even 5% yield may not seem like much to many other investors, yet dividends are far more reliable than capital gains. A stock that pays a dividend of $1 this year will probably do the same next year. It may even rise to $1.05.

Savvy investors are paying more attention to dividend yields (a company’s total annual dividends paid per share divided by the current stock price). The best dividend stocks respond by doing their best to maintain, or even increase, their payouts.

What’s more, taxpayers who hold Canadian dividend-paying stocks get a tax break. Their dividends can be eligible for the dividend tax credit in Canada. This means that dividend income will be taxed at a lower rate than the same amount of interest income.

Ontario investors, for example, in the highest tax bracket pay tax of around 39% on dividends, compared to 53% on interest income. Investors in the higher tax bracket pay tax on capital gains at a rate of 27%.

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. For example, in the highest tax bracket, investors pay tax of around 39% on dividends, compared to 53% tax on interest (Canada).

Look for these seven characteristics of top stocks and you will be ahead of many investors in learning how to invest in dividend stocks in Canada for maximum returns

1. They provide regular income
2. They are one of the dominant firms in an industry
3. They feature hidden assets
4. They are high-quality, proven companies
5. They operate a well-established business
6. They have strong management
7. They have manageable debt

Above all, for a true measure of stability, focus on stocks that pay a dividend they’ve maintained or raised 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. As reliable dividend payers, they also ensure you make the most of the lower tax rate on that income, when you consider the relatively high tax on interest (Canada).

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

Here are important dates conservative investors should know to get the most benefits from your dividend calendar

• The declaration date: Several weeks in advance of a dividend payment, a company’s board of directors sets the amount and timing of the proposed payment. The date of that announcement is known as the declaration date.
• The payable date: The payable date is the date set by the board on which the dividend will actually be paid out to shareholders.
• The record date: Only shareholders who hold the shares before the payable date will receive the dividend payment. That date is known as the record date, and is set any number of weeks before the payable date.

Use our three-part Successful Investor approach to find 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.

Bonus tip: Blue-chip stocks are great additions to conservative investors’ portfolios

High-quality, blue-chip companies are good companies for conservative investors to focus on. Blue-chip companies are typically defined as firms whose stocks have a national reputation for quality, reliability and the ability to operate profitably in good times and bad. They most frequently pay dividends, which are taxed lower than the tax on interest (Canada).

When assessing blue chip companies that are good companies to invest in, you need to ask: What are they doing to remain vital? These companies should hold strong positions in healthy industries and have strong management that will make the right moves to remain competitive in a changing marketplace.

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

A high dividend yield can be misleading. How do you ensure that you are investing in the best dividend stocks available?

What was the best advice anyone gave you on investing in dividend stocks in Canada?

This article was originally published in 2022 and is regularly updated.