How to Invest Money in Canada for maximum portfolio returns: Focus on Dividend-Paying Stocks

If you want to know how to invest money in Canada successfully, then you need to start by looking for high-quality, dividend-paying stocks

If you are interested in learning how to invest money in Canada for portfolio success, then start with dividend-paying stocks.

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


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How to invest money in Canada: Look for stocks with sustainable dividends

Canadian taxpayers who hold the highest dividend Canadian 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.

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%.

We recommend that you never underestimate the power of quality dividend Canadian stocks. For some investors, 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. 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, which can have an enormous ballooning effect on the value of an investment over the long term. This will lift the overall returns on your portfolio. Reinvested dividend payments act in a similar fashion.

All in all, as we mentioned earlier, we think that dividends can contribute up to a third of your long-term investment returns, even without the tax-cutting effects of the dividend tax credit.

How to invest money in Canada for dividends: The best Canadian dividend payers dominate their industries

We look for Canadian dividend stocks that have industry prominence, if not dominance. Our reasoning, besides brand recognition, is that major companies can influence legislation, industry trends, etc., to suit themselves. Minor firms cannot.

Canadian dividend stocks are an important contributor to your long-term gains, and dividend-paying stocks tend to expose you to less risk than non-dividend-payers. That’s why the majority of your stocks should be dividend-payers at all times. As you get older and closer to retirement, you should raise the proportion of dividend-paying stocks in your portfolio, to cut risk and improve the stability of your investment results.

How to invest money in Canada: High quality stocks + high quality dividends = a winning combo

Some good companies reinvest profits 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. For greater 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.

How to invest money in Canada: Always follow our three-part Successful Investor approach

First, invest mainly in well-established companies. When the market goes into a lengthy downturn, these stocks generally keep paying their dividends, and they are typically among the first to recover when conditions improve.

Second, spread your money out across most if not all of the five main economic sectors (Manufacturing & Industry; Resources & Commodities; Consumer; Finance; and Utilities). This helps you avoid excess exposure to any one segment of the market that is headed for trouble. This will also dampen your portfolio’s volatility in the long term.

Third, avoid or downplay stocks in the broker/media limelight. That limelight tends to raise investor expectations to excessive levels. When companies fail to live up to expectations, these stocks can plunge.

An extremely high dividend yield not backed by a strong history of dividend-paying can be risky. How do you deal with stocks like these?

What do you think are some of the smartest investments Canadian investors can make?

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