Topic: Dividend Stocks

5 top Canadian dividend stocks to invest in

August 28, 2024|by Pat McKeough

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Here are 5 Canadian dividend stocks we recommend holding in your portfolio despite economic uncertainty

One of the key points in our three-part investment advice is to invest mainly in well-established dividend-paying stocks. The COVID-19 pandemic and the resulting inflation and challenging economy highlight the value of holding dividend payers in tumultuous times. Successful investors pay a lot of attention to dividend yields from Canadian dividend stocks. Indeed, the best stocks to invest in (Canada) can provide dividends that contribute up to a third of your long-term investment returns. That’s even before factoring in the tax savings associated with the Canadian dividend tax credit.

The dividend tax credit offered to Canadians can greatly increase your investment returns

Canadian taxpayers who hold Canadian dividend stocks get a special bonus. Their dividends can be eligible for the dividend tax credit in Canada. That dividend tax credit—available on dividends paid on Canadian stocks held outside of an RRSP, RRIF or TFSA—will cut your effective tax rate. There is also the question of whether index funds pay dividends? and are they tax-credit eligible?

With the Canadian Dividend Tax credit, 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%.

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What Canadian dividend stocks offer investors

The income from the best stocks to invest in (Canada) are far more reliable than capital gains. A stock that pays a $1 dividend this year will probably do the same next year. In addition, the best dividend stocks to invest in (Canada) like to ratchet those payments upward—hold them steady in a bad year, and raise them in a good one. That also gives you a hedge against inflation.

For a true measure of stability, we focus on those companies that have maintained or raised their dividends during economic downturns. That marks them as the best stocks to invest in (Canada). It also suggests that these firms have left 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.

5 Canadian dividend stocks worth investing in

We still think investors will profit most—and with the least risk—by buying shares of well-established, dividend-paying stocks with strong business prospects. They are among the best stocks to invest in (Canada).

Specifically, these companies tend to have leading positions in healthy industries. They also have strong management that will make the right moves to remain competitive in a changing market.

Stocks like these give investors an additional measure of safety despite today’s volatility. And the best dividend stocks to invest in (Canada) offer the attractive combination of a moderate p/e (the ratio of a stock’s price to its per-share earnings), steady or rising dividend yields (annual dividend divided by the share price) and promising growth prospects.

Here are some of the best dividend stocks to invest in (Canada) regardless of short-term ebbs and flows in their share prices. We think they meet all those criteria:

1. Bank of Nova Scotia, Toronto symbol BNS
2. Canadian National Railway, Toronto symbol CNR
3. Imperial Oil Ltd., Toronto symbol IMO
4. Loblaw Companies Ltd., Toronto symbol L
5. Telus Corp., Toronto symbol T

Do index funds pay dividends?

It’s a question we get a lot from relatively new investors looking at ETFs as an addition to their individual stock holdings: do index funds pay dividends? The answer is yes, and we feel the passively-managed ETFs that track an established index and focus on quality stocks are the best way to earn income from ETF holdings, while avoiding the higher management fees that cut into your income.

Look for Canadian dividend stocks with consistency top of mind

One way of picking the best stocks to invest in (Canada) is to look for companies that have been paying dividends for at least 5 to 10 years. Companies can trump up quarterly earnings, issue press releases to appear to be making strong progress, but they cannot fake dividends. Dividends are cash outlays that an unsuccessful company could never produce. A history of dividend payments is one commonality that all the best stocks to invest in (Canada) have.

Dividend stocks are a sign of investment quality. Some good companies reinvest profit 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.

Are you already investing in any of these Canadian dividend stocks? How have they performed? Share your experience with us in the comments.

This post was originally published in 2016 and is regularly updated.