Topic: Dividend Stocks

QUIZ: What are eligible dividends in Canada and what is their value to investors?

December 4, 2019|by Scott Clayton

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What are eligible dividends? Take our dividend quiz to find out and discover some additional benefits to dividends that will help your portfolio returns

What are eligible dividends in Canada? Canadian taxpayers who hold Canadian dividend stocks get a special bonus. Their dividends can quality for the dividend tax credit in Canada. This dividend tax credit will cut your effective tax rate.

What are eligible dividends worth to investors? What about dividends in general? Take our quiz below to discover the answer to that question, and some information on dividends that you may have not known.

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. The dividend tax credit is available to investments held outside …

1. An RRSP
2. An RRIF
3. A TFSA
4. All of the above

You are correct if you answered 4.

We recommend Canadian dividend stocks because Canadian taxpayers who hold Canadian dividend stocks are eligible for the dividend tax credit in Canada. This dividend tax credit is available for dividends paid on Canadian stocks held outside of an RRSP, RRIF or TFSA.

B. True or False: A dividend yield is never misleading.

You are correct if you answered “False.”

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.

As well, you should always remember that while aggressive stocks may hold the potential for greater gains than conservative selections, they expose you to a higher level of risk—whether or not they are currently paying dividends.

That’s why 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.

C. A true measure of dividend-paying stability includes:

1. A big dividend yield
2. A company’s initial dividend payout
3. A company that has maintained or raised their dividends during economic or stock market downturns
4. All of the above

You are correct if you answered 3.

You should look for stocks that have a long history of paying (and raising) their dividends. For a true measure of stability, focus on those companies that have maintained or raised their dividends during the recent recession and stock-market downturn. 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 provide an attractive mix of safety, income and growth.

D. Characteristics of the best dividend-paying stocks include:

1. Hidden assets
2. Sustainable dividends
3. A historical record of paying dividends for at least five years
4. All of the above

You are correct if you answered 4.

Dividend history is very important to dividend stocks. Ideally, you should look for dividend stocks that have been paying dividends for 5 or more years.

Also, as a general rule, companies that make money regularly are safer than chronic or even occasional money losers. Companies can fake earnings, but dividends are cash outlays. If you only buy dividend-paying stocks, you’ll avoid most frauds.

Successful investors recognize that hidden assets are a great way to cut risk, for conservative and aggressive investors alike. One great example is research and development.

E. Dividend Reinvestment Plans (DRIPs) involve …

1. Higher broker commissions
2. High cash payouts
3. Additional shares in lieu of cash dividends
4. None of the above

You are correct if you answered 3.

Some companies provide dividend reinvestment plans, or DRIPs, that allow shareholders to receive additional shares in lieu of cash dividends. DRIPs don’t require the participation of brokers, so shareholders save on commissions.

DRIPs also eliminate the nuisance effect of receiving small cash dividend payments. Second, some DRIPs let you reinvest your dividends in additional shares at a discount to current prices. Third, many DRIPs also allow optional commission-free share purchases on a monthly or quarterly basis.

Overall, we think that DRIPs are okay to participate in. But here are a few things to keep in mind:

• Many investors select their Canadian stock market investments solely on the basis of the existence of the DRIP option. We think the availability of a DRIP is only a bonus, rather than a reason to invest by itself. Investing only in stocks that offer DRIPs limits both investment choice and opportunity.
• The advent of the low-cost discount brokerage and online investing has reduced the commission cost of investment trades. Thus, the commission-free investing that DRIP investing allows is less of an advantage today than it was in the past.
• Taxes are still payable on dividends that are reinvested.

Bonus tip: Use our three-part Successful Investor approach to make more money over time

1. Hold high-quality, mostly dividend-paying stocks.
2. Spread your money out across most if not all of the five main economic sectors: Manufacturing & Industry, Resources & Commodities, Consumer, Finance and Utilities.
3. Downplay or stay out of stocks in the broker/media limelight.

What is the biggest mistake you’ve made with dividend investing?