Do you like my camera skills?  I love the iPhone- its so easy- take a picture and send it to myself in an email and….voila! A picture for my blog is ready!  Anyway, I digress, we’re talking about dividends here.

So what are dividends?

They’re something magical.  They’re great. Win-win in terms of taxation. They’re tax efficient.

Dividends, according to Investopedia are profits from the company and they can be either reinvested into the company or paid out in the form of dividends:

“Dividends may be in the form of cash, stock or property. Most secure and stable companies offer dividends to their stockholders. Their share prices might not move much, but the dividend attempts to make up for this.”

I like the words “secure” and “stable”.  Usually only big time companies (corporations) offer dividends to their stockholders.  High growth companies reinvest their earnings into the company to make the company grow bigger and faster.  High growth companies’ share prices may move more.

Canadian Corporations Dividend Tax Credit

Canadian corporations that pay out dividends get a tax break, so you get one too.  In fact, the dividend income (which you have to report or else the tax man will be after you) that you get is tax efficient.  Dividend income from Canadian corporations are taxed at a lower rate than other forms of income.

You get a dividend tax credit (you’ll see the dividends paid out on your T5 slips) which you submit during tax season.  The formula is pretty complicated, but it pretty much sums up to you paying very little in dividend taxes.  The dividend tax credit came about because the Canadian government doesn’t want to tax you twice (it taxed the corporation already so it won’t tax you as much).

Canadian Dream Free at 45 explains the Canadian Dividend Tax Credit in Depth on his blog.

Also, sometimes you get a negative tax amount with Canadian dividends, and this can be used to reduce the taxes payable. explains in depth.

However, the Canadian government doesn’t get a hoot If you bought a foreign (e.g. US) corporation’s stock and it paid out dividends.  These dividends would be considered foreign and you won’t get a tax break.  They don’t care about taxing you twice.  You’ll pay tax on that dividend like you pay tax on a GIC (interest income) or other non-tax efficient sources of income.  Before you know it, that chunk of money will be whittled away to something much smaller.

So what do you need to look for in a dividend paying stock?

You want to look at the Dividend Yield.  Let’s take FTS.TO for example (it’s a gas and electricity utility company) .  It’s current dividend yield is 3.46. So if you were to buy it at its current price of $32.33, the percentage back you would get in dividends is 3.46%.  The current dividend is $0.28 quarterly.  Multiple that by four, you get $1.12.  $1.12/$32.33= 3.46%.

You can see that the dividends paid out for the past year is $1.10 ($0.28 Aug, May, Feb and $0.26 last November).

That’s another good sign.  When they have CONSISTENTLY increased their dividends over a long period of time, you know the corporation you’re investing in a stable company and your investment shouldn’t (but you never know, I suppose) hurt your portfolio.

FTS.TO went from $0.16 a share in 2006 to $0.28 a share!  That’s a 75% increase in dividends in less than five years.

Likewise goes for a company who suddenly decreases their dividends.  You know you’re in hot water if a company decreases their dividends (namely MFC.TO which I also own).  Investors will start jumping ship.

Readers, this is a very basic explanation of dividends, is there anything else I might be missing that you want to add? What portion of your portfolio do you include Canadian dividend paying corporations?

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