Topic: Dividend Stocks

The highest dividend Canadian stocks can also give you a break on taxes

April 20, 2020|by Jim Bates

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Invest in the highest dividend Canadian stocks to supercharge your portfolio returns

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%.

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Never underestimate the power of the highest dividend Canadian stocks

To some investors this may seem trivial because 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 to $1.02). As well, some investors forget about the wonderful effects compounding interest 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, and lift the overall returns on your portfolio. Dividend payments act in a similar fashion.

All in all, 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.

The best of the highest dividend Canadian stocks have a history of success

Follow our rules over long periods and you’ll probably achieve better-than-average investing results. But your results will be uneven, in a variety of ways. They’ll vary widely from year to year. In many years, most of your profits will occur in only a few of the sectors; you may lose money in the others.

Our first rule tells you to buy high-quality stocks. These stocks have generally been succeeding in business for a decade or more, perhaps much longer. But in any case, they have shown that they have a durable business concept. They can wilt in economic and stock-market downturns, like any stock. But most thrive anew when the good times return, as they inevitably do.

Over long periods, you’ll probably find that a third of your stocks do about as well as you hoped, a third do better, and a third do worse. This is partly due to that random element in stock pricing that we’ve often mentioned. It also grows out of the proverbial “wisdom of the crowd.” The market makes pricing mistakes and continually reverses itself. But the collective opinion of all individuals buying and selling in the market eventually beats any single expert opinion.

The highest dividend Canadian stocks provide steady dividends—a sign of investment quality

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 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, top dividend stocks provide an attractive mix of safety, income and growth.

The highest dividend Canadian stocks can feature hidden assets

Take a close look at the balance sheet of dividend stocks. Can you spot any hidden assets? For instance, when a company buys real estate, the purchase price goes on its balance sheet as the historical value of the asset. Over a period of years or decades, the market value of that real estate may climb substantially. But the historical purchase price remains unchanged on the balance sheet. You have to look closely to spot this hidden value. At times, the hidden assets in a company’s real estate can even come to exceed the market value of its stock.

Don’t judge solely on dividend yield

It’s important to avoid judging a company based solely on its dividend yield (the percentage you get when you divide a company’s current yearly payment by its share price).

That’s because a high yield can sometimes be a danger sign rather than a bargain. For example, a dividend stock’s yield could be high simply because its share price has dropped sharply in anticipation of a dividend cut.

We recommend that you look beyond dividend yield when making investments in high growth dividend stocks, and look for dividend stocks that have also established a business and have at least some history of building revenue and cash flow.

Do you feel safe about investing in the highest dividend Canadian stocks or are you suspicious of their high dividend yields? Share your thoughts with us in the comments.