Topic: Dividend Stocks

How Do You Build a Canadian Dividend Portfolio for Maximum Long-Term Gains?

January 25, 2024|by Scott Clayton

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Creating a strong Canadian dividend portfolio will let you prosper from sustainable dividends—and here are the important factors that will guide you to that success

Here at TSI Network, we think Canadian dividend stocks are some of the best shares you can own in your stock portfolio. Dividend stocks from Canada generally receive special tax benefits—U.S. dividends are not eligible for these tax benefits. This gives a Canadian dividend portfolio, especially when reinvesting dividends, added value.

But how do you maximize long-term gains in your Canadian dividend portfolio?

• You’ll benefit from the tax savings alone, since dividend income is taxed at a lower rate
• Buy a dividend-paying stock one day or more before the ex-dividend date
• Invest mainly in well-established, dividend-paying companies
• Spread your money out across most if not all of the five main economic sectors (Manufacturing & Industry; Resources & Commodities; Consumer; Finance; Utilities)
• Downplay or avoid dividend stocks in the broker/media limelight.
• Consider reinvesting dividends to compound your returns

The Growing Power of Dividends Learn everything you need to know in '7 Winning Strategies for Dividend Investors' for FREE from The Successful Investor. The Best Canadian Dividend Stocks to Buy: REITS Canada and other Top Canadian Dividend Stocks.  I consent to receiving information from The Successful Investor via email. I understand I can unsubscribe from these updates at any time.

What are the tax advantages of a Canadian dividend portfolio?

If you are a Canadian taxpayer holding Canadian dividend stocks, you are eligible for the dividend tax credit. Dividend income is taxed at a lower rate than the same amount of interest income. The benefits are even greater when reinvesting dividends over the long term.

All in all, we think Canadian dividend shares are some of the best stocks you can own, particularly when reinvesting dividends for compound growth.

What are the key dividend dates that affect your Canadian dividend portfolio?

Dividend stocks are an essential part of a good conservative investing philosophy, and they can help maximize your gains through reinvesting dividends. But there are certain details you should know about the way dividends are declared and paid out.

There are 4 key dates involved with payments from dividend stocks:

• 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.
• Payable Date: This is the date set by the board on which the dividend will actually be paid out to shareholders.
• Record Date: Only shareholders who hold the stock before the payable date will receive the dividend payment. That date is known as the record date; it is set any number of weeks before the payable date.
• Ex-dividend Date: Two business days before the record date, the shares begin to trade without their dividend. This date is the ex-dividend date. If you buy stocks one day or more before their ex-dividend date, you will still get the dividend. That’s when a stock is said to trade cum-dividend. If you buy on the ex-dividend date or later, you won’t get the dividend. The ex-dividend date is in place to allow pending stock trades to settle.

As an example, here’s how it works for TC Energy Corp.’s (formerly TransCanada Corp.) dividend of $0.90 a share payable on Monday, October 31, 2022, to shareholders of record at the close of business on Friday, September 30, 2022. One business day before the record date, the shares began to trade without their dividend, that is, on the ex-dividend date of September 29, 2022. If you buy a dividend-paying stock one day or more before the ex-dividend date, you will still get the dividend (because the shares are trading cum-dividend). But if you were to buy these shares on the ex-dividend date or later, you would not get the dividend.

Are high dividend yields a danger sign for an investor’s portfolio?

When looking for stocks for your Canadian dividend portfolio, you should avoid the temptation of seeking out stocks with the highest yields simply because of those above-average yields.

That’s because a high yield may signal danger rather than a bargain if it reflects widespread investor skepticism that a company can keep paying its current dividend. Dividend cuts will always undermine investor confidence—and can quickly push down a company’s stock price.

Above all, for a true measure of stability, focus on stocks that have a high dividend that they have 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.

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

In summary, building and maintaining a successful dividend portfolio in Canada requires careful consideration of multiple factors. This comprehensive guide highlights the essential elements of dividend investing, from understanding tax advantages to tracking important dividend dates. The key to creating wealth through Canadian dividend stocks lies in selecting well-established companies across diverse economic sectors, paying attention to dividend declaration dates, and avoiding the trap of chasing high yields without considering underlying fundamentals. Tax benefits through the dividend tax credit make Canadian dividend stocks particularly attractive for domestic investors. The article emphasizes the importance of looking beyond just high yields and instead focusing on companies with proven track records of maintaining or increasing dividends during economic downturns. This strategy helps investors build a resilient portfolio that balances income, growth, and safety. By following these guidelines and maintaining a disciplined approach to dividend investing, investors can develop a strong foundation for long-term financial success in the Canadian market.

How have you diversified your holdings in a Canadian dividend portfolio?

How much of your investor portfolio do you dedicate to Canadian dividend stocks?

This article was originally published in November 2020 and is regularly updated.