Long-time Successful Investor readers may recall that a decade or two ago, we regularly reminded them that dividends could contribute up to a third of their long-term investment returns, without even considering the tax-cutting effects of the dividend tax credit (see below).

Earlier in this decade, yields of dividend paying stocks were generally too low to provide a third of investment returns. But now that yields of dividend paying stocks have moved back up to their current level, it’s realistic to assume they will once again contribute as much as a third of your total return. That’s a good thing for investors, since dividends are more dependable than capital gains as a source of investment income.

Tax credits add to your gains

As an added benefit, dividends paid on Canadian stocks held outside an RRSP are eligible for the dividend tax credit, which cuts your effective tax rate.

For example:

If you earn $1,000 in dividend income and are in the top 46.41% tax bracket, you will pay $230.60 in taxes.

That’s a bit better than capital gains, which offer tax-advantaged income as well. On that same $1,000 in income, you will only pay $232.10 in taxes.

It’s a lot better than the $464.10 in income taxes you’ll pay on the same $1,000 amount of interest income.

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.

Almost any investor will gain from focusing on dividend paying stocks with high current yields. And you’ll also benefit from stocks that promise steadily increasing dividend payments – like those we recommend in our Conservative Growth Portfolio. Their yields (based on your cost) can rise to a very high level over a period of years. What’s more, as dividends rise, stock prices will rise as well, so these stocks can also provide a capital-gains bonus.

The current issue of The Successful Investor includes our Conservative Growth Portfolio supplement.

Conservative Growth stocks are those we think have above-average growth prospects, as well as providing a high level of dividend income. The latest Conservative Growth Portfolio includes stocks with dividend yields ranging up to 11.6%. Click here for a free trial of The Successful Investor.

IGM Financial is Canada’s largest independent mutual fund company. IGM is in our latest Conservative Growth portfolio, and we also cover the stock in our current issue of The Successful Investor.

IGM manages $108.5 billion of assets. Power Financial owns 56.4% of the company. IGM continues to do a good job of hanging onto its clients. In the first quarter of this year, the redemption rate at its main Investors Group division was 7.7%, among the lowest in the industry, and down from 7.9% in the last quarter of 2008.

IGM is in a strong position to benefit from the recent market rise. Its $2.05 dividend yields a high 4.9%.

Dividend-paying stocks in a portfolio are a great way to add to your gains, especially when you invest with our three-part program:
1. holding mostly high-quality, dividend paying stocks,
2. keeping your portfolio well-balanced among the five economic sectors, and
3. downplaying or staying out of stocks in the broker/media limelight.