Topic: Dividend Stocks

QUIZ: Are you a dividend investor? Canada provides special benefits on Canadian dividends. Test your knowledge of this—and more.

November 6, 2019|by Scott Clayton

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Test your understanding as a dividend investor. Canada, for example, gives its residents extra value from their dividend-paying investments. Test your knowledge now on this and other key points.

Savvy investors continue to focus on dividend stocks—and the best of these dividend stocks respond by doing their utmost to maintain, or even increase, their payouts. Even if you don’t need current income from your portfolio, we still think you should invest in the top Canadian dividend stocks.

There is a lot to know if you want to be a successful dividend investor. Here’s a quiz to test your knowledge:

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.

A. True or false? Canadian taxpayers holding Canadian dividend stocks get a bonus.

You are correct if you answered “True.”

There are benefits to being a Canadian dividend investor. Canadian taxpayers who hold Canadian dividend-paying 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.

This dividend tax credit is generally available on dividends paid on Canadian stocks held outside of an RRSP, RRIF or TFSA.

B. Dividend investors sometimes consider dividend reinvestment plans (DRIPs). How do you participate in a DRIP?

1. It just happens with the purchase of the dividend-paying stock
2. The dividend-paying company will push you to set one up
3. You must own and register a company’s shares, then contact the company for the forms you fill out to enroll in the plan
4. None of the above

You are correct if you answered 3.

To participate in a DRIP, you must first own and register one or more shares of a company’s stock. Share registration (through a traditional or discount broker) will generally cost between $40 and $50 per company. Then you must contact the company to ask for the forms you fill out to enroll in the plan.

C. The best places to get information on DRIPs include…

1. On a company’s website
2. The inside back cover of most companies’ annual reports
3. The investor relations department of a company
4. All of the above

You are correct if you answered 4.

Most companies that offer DRIPs provide details on their websites. Another place to look for information is on the inside back cover of most companies’ annual reports. You can also contact the investor relations department of companies you wish to invest in.

D. True or False: A DRIP is a sign of investment quality

You are correct if you answered “False.”

We think DRIP investing is okay to participate in if you use them to cut commission costs on stocks you would have bought anyway. But confining your investments to stocks that offer DRIPs is a terrible idea. That’s because not all stocks that offer DRIPs are good investments. And you can lose a lot more on these stocks than you could ever save on commissions.

E. If you earn $1,000 in dividend income and you are in the top 50% tax bracket, how much will you pay in taxes?

1. $290
2. $250
3. $310
4. $320

You are correct if you answered 1.

If you earn $1,000 in dividend income and are in the top 50% tax bracket, you will pay about $290 in taxes.

That’s a bit more tax than on capital gains, which offer tax-advantaged income as well. On that same $1,000 in income, you will only pay $250 in capital gains taxes.

It’s a lot better than the roughly $500 in income taxes you’ll pay on the same $1,000 amount of interest income.

F. Find the best Canadian dividend ETF by…

1. Finding an ETF with a history of paying dividends
2. Looking at the current financial health of each company held in the ETF
3. Finding a broad-based ETF with sufficient diversification
4. All of the above

You are correct if you answered 4.

Look for ETFs that hold companies with records of long-term success and a long history of paying dividends. These companies are the most likely to keep paying and increasing their dividends.

Pay attention to the current financial health of each company in the ETF. If a company is doing well, has done so consistently, and shows signs of growth, these factors are indicative of stocks that will keep paying a dividend.

Know how broad the holdings of the ETF are. The broader the ETF, the less volatility it may have. A sector-based ETF, like one that tracks resource stocks for instance, may be more volatile.

Bonus tip: Follow our three-part Successful Investor strategy to make more money over the long term

1. Invest mainly in well-established, mostly dividend-paying companies;
2. Spread your money out across most if not all of the five main economic sectors (Manufacturing & Industry; Resources & Commodities; the Consumer sector; Finance; Utilities);
3. Downplay or avoid stocks in the broker/media limelight.

Do you look specifically for stocks that offer DRIPs, or do you think of a DRIP as a bonus?