When you learn more about stock market investment, you’ll realize there are two main ways a company can distribute its profits to shareholders. It can buy back its own shares, or it can pay dividends. Both dividends and buybacks pay off for investors. Here are 3 reasons why:
A company boosts its per-share profit by buying back its shares back, because profits get divided among fewer shares.
Boosting per-share profits can also push up share prices. Plus, buybacks let you defer taxes on those capital gains. That’s because you only pay capital-gains taxes when you sell. What’s more, you’ll pay tax at half the rate on capital gains than you would on ordinary income. And you can offset capital gains with capital losses.
Dividends have tax advantages. You’ll pay tax on dividends in the year you get them, if you hold the shares outside your RRSP. However, dividends on Canadian companies receive favourable tax treatment in Canada, thanks to the dividend tax credit.
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CN Rail: A good example of a stock market investment that raises its dividend and buys back shares
Some companies regularly buy back shares and raise their dividends. That’s a double win for investors. A good example is Canadian National Railway (symbol CNR on Toronto), a stock market investment we analyze in our Successful Investor newsletter.
CN recently raised its quarterly dividend by 20.4%, from $0.27 to $0.325. The new annual rate of $1.30 yields 1.8%. CN has now raised its dividend 15 times since it began trading as a public company in 1995.
In addition, CN’s board of directors has approved a share repurchase plan that allows the stock market investment to buy back up to 16.5 million of its common shares by the end of 2011. In the first quarter of 2011, the company spent $340 million to buy back 5.0 million shares.
Our picks help you automatically profit from regular buybacks and dividend income
If you stick with our long-standing advice of investing mainly in well-established, dividend-paying companies with strong business prospects (like those we recommend in The Successful Investor), you will automatically earn regular dividend income.
Plus, the fact that these companies have strong positions in healthy industries makes it more likely that they will buy back shares on a regular basis, and raise their dividends.
You can get our clear buy/sell/hold advice on CN Rail FREE—but you must act now!
In tonight’s Successful Investor Email Hotline (which we send out to Successful Investor subscribers at 6 p.m.), we take a fresh look at CN Rail to see if the stock market investment can continue its pattern of steadily raising its dividend and buying back its shares. We conclude our analysis with our clear advice on whether you should buy, hold—or sell—the stock.
But to get tonight’s Successful Investor Hotline, and our full analysis of CN Rail, you must take a FREE trial to The Successful Investor right away. When you do, you’ll get one free month of The Successful Investor and 6 Special Reports—all with no cost or obligation.
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