The top Canadian dividend stocks have a history of paying a dividend, even during economic and stock market downturns. They also offer a special tax benefit.

Even if you don’t need current income from your portfolio, we still think you should invest in the top Canadian dividend stocks. When you pick the best dividend stocks, you are, for the most part, investing in safer and more secure companies. That’s in large part because of the dividends these stocks pay. Dividends, after all, are much more reliable than capital gains.

Our Successful Investor approach recommends investing in high-quality, dividend-paying stocks for good reasons. Here are the key ones:

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Top Canadian dividend stocks receive tax credits

Here in Canada, pre-tax dividend yields have an even bigger advantage over interest yields. That’s because dividends on Canadian stocks qualify for the dividend tax credit. For Canadian investors, this raises the after-tax value of Canadian dividends by about a third, compared to the after-tax value of interest from any source, or foreign dividends (neither of which qualifies for the dividend tax credit).

This means that investors in the highest tax bracket will pay tax of around 29% on dividends, compared to 50% on interest income. Note that at the same time, investors in the highest tax bracket pay tax on capital gains at a rate of about 25%.

Top Canadian dividend stocks have higher investment quality

Dividends don’t always get the respect they deserve, especially from beginning investors. A dividend stock’s yearly 2% or 3% or 5% yield may not seem like much to many investors, yet dividends are far more reliable than capital gains. A stock that pays a dividend of $1 this year will probably do the same next year. It may even rise.

So savvy investors continue to pay attention to dividend yields (a company’s total annual dividends paid per share divided by the current share price). The best dividend stocks respond by doing their best to maintain, or even increase, their payouts.

The top Canadian dividend stocks have a history of paying a dividend

Look for companies that have been paying dividends for, ideally, at least 5 to 10 years when investing in dividend stocks. Companies can trump up quarterly earnings, issue press releases to appear to be making strong progress, but they cannot fake dividends.

Some good companies reinvest their profits instead of paying dividends, but fraudulent and failing companies are hardly ever dividend-paying stocks.

Creative accounting can produce false impressions of prosperity and hide financial problems. But accounting can’t create cash for this year’s dividend, let alone conjure up a history of past dividends. Stick to dividend payers that meet our Successful Investor criteria and you’ll avoid most of the market’s greatest disasters.

Many of the top Canadian dividend stocks also offer steady growth prospects 

By definition, growth stocks are companies that have above-average growth prospects. They are firms whose earnings growth has been above the market average, and is likely to remain above average. Top-quality dividend stocks have the ability to reinvest earnings for growth—and pay a dividend.

As we mentioned above, dividend history is very important to a dividend growth stocks. As a general rule, companies that make money regularly are safer dividend-payers than even occasional money losers.

What is the dividend stock’s debt load like? Would it have a hard time recovering from an economic downturn? The more manageable the debt, the better. When bad times hit, debt-heavy companies often go broke first. Especially ones that also keep trying to allocate part of their cash flow to paying dividends.

Although dividend stocks that are also growing rapidly can be volatile, they can often make good long-term investments. They may be well-known stars or quiet gems, but they do share one common attribute—they are growing at a higher-than-average rate within their industry, or within the market as a whole, for years or decades.

Top Canadian dividend stocks can pay a dividend even during a downturn

Look for dividends that are paid even during market downturns. 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, they provide an attractive mix of safety, income and growth. The best Successful Investor dividend stocks respond to tough economic times by doing their best to maintain, or even increase, their payouts.

How much of your investment portfolio is made up of dividend stocks?