Dividend investing in Canada is a great profit-spinning strategy, especially if you factor in the Canadian dividend tax credit

If you include top-quality dividend stocks in your portfolio, the income they provide can make up a significant percentage of your total return—as much as a third of your gains. And at the same time, dividends are more dependable than capital gains as a source of investment income.

Balance and diversify your dividend investing in Canada like we recommend, and you will expose yourself to less risk.

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Focus on quality to profit the most from dividend investing in Canada

We still think investors will profit most—and with the least risk—by buying shares of well-established, dividend-paying stocks with strong business prospects.

These are companies that have leading positions in healthy industries. They also have strong management that will make the right moves to remain competitive in a changing market.

Stocks like these give investors an additional measure of safety in times of market volatility. And the best ones offer the attractive combination of a moderate p/e (the ratio of a stock’s price to its per-share earnings), steady or rising dividend yields (annual dividend divided by the share price) and promising growth prospects.

Look at both value stocks and growth stocks to get the greatest benefits from your dividend investing

Savvy value-stock investors know that many value stocks consistently offer dividends with above-average yields, although capital gains may take longer to materialize.

With our Successful Investor approach, we also recommend looking for value stocks that have an established track record of paying dividends. One of the best ways of picking a quality dividend stock is to look for companies that have been paying dividends for at least 5 to 10 years. Companies can trump up quarterly earnings, or issue press releases to appear to be making strong progress, but they cannot fake dividends. Dividends are cash outlays that an unsuccessful company could never produce.

Investors generally look to growth stocks for capital gains and to more conservative stocks, like banks and utilities, for dividend income. Yet there are a number of dividend growth stocks that can also add to your current income. Some even have dividend yields that are as high—or even higher—than yields on more established companies.

Dividend stocks are a sign of investment quality. Some good companies reinvest profit 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.

Look to dividend investing in Canada to gain special tax benefits

Canadian taxpayers who hold Canadian dividend stocks get a special bonus. Their dividends are eligible for the dividend tax credit in Canada. This dividend tax credit—which is available on dividends paid on Canadian stocks held outside of an RRSP, RRIF or TFSA—will cut your effective tax rate.

This means that dividend income will be taxed at a lower rate than the same amount of interest income.

As mentioned, Canadian dividend stocks are an important contributor to your long-term gains, and dividend-paying stocks tend to expose you to less risk than non-dividend-payers. That’s why the majority of your stocks should be dividend-payers at all times. As you get older and closer to retirement, you should raise the proportion of dividend-paying stocks in your portfolio, to cut risk and improve the stability of your investment results.

Weather volatile environments through dividend investing in Canada

When investing, we think you will profit more from focusing on companies that have maintained or raised their dividends during both economic and stock market downturns. These firms have proven themselves able 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.

By diversifying across most if not all of the five sectors, you avoid overloading yourself with stocks—including dividend stocks–that are about to slump simply because of industry conditions or investor fashion. You also increase your chances of stumbling upon a market superstar—a stock that does two to three or more times better than the market average.

Use our three-part Successful Investor approach when dividend investing in Canada to make the best stock selections

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

What sectors do you focus on for dividend growth with your investments?

What is the most appealing aspect of dividend investing for you?