Every Canadian should earn income from Canadian dividend stocks. Why? It’s because you can maximize your passive income with these dividends that are more favourably taxed than your job’s income, interest income, and rental income, which are taxed at higher rates. The reason is that companies have already paid taxes on their earnings, and they’re paying dividends from these earnings. So, if dividends are taxed at the full tax rate, then, it’ll be double taxation.
How much taxes can you save from dividend income?
Let’s say you lived in British Columbia and earned $90,000 this year, including $60,000 from your job and $30,000 from eligible Canadian dividends. The income tax for the $30,000 dividend income would only be $489 versus $16,920 if you earned an additional $30,000 from your job. That’s a big difference of $16,431 in your pocket.
This is why you should start building passive income from Canadian dividend stocks as soon as possible and save regularly every week or every month to make it a habit.
No matter which tax bracket you’re in, eligible Canadian dividends are taxed at lower rates than your job’s income, interest income, and rental income. Strong Canadian companies pay out millions of dollars in dividends every year. It would be smart for every Canadian to get their hands on their share.
A good Canadian dividend stock to buy now
Because of higher interest rates last year, the stock market had a selloff. Consequently, Canadians can now buy dividend stocks for higher yields. You can investigate for safe dividend yields of about 5-6%.
Big Canadian bank stock Bank of Nova Scotia (TSX:BNS) is a good consideration for passive income. In the last 12 months, it’s paid out about $5.2 billion in dividend income.
Right off the bat, it offers a juicy dividend yield of almost 6.2%. At $66.51 per share, the stable bank stock trades at about 8.3 times earnings, which is a discount of about 28% from its long-term normal valuation. A reversion to the mean could lead to price gains of 40% over the next few years.
Its earnings cover its dividends with a payout ratio of about 60%. Normally, its payout ratio is about 50%. If you are worried about Bank of Nova Scotia’s higher-risk exposure to geographies outside of Canada and the U.S., you can be reassured that it has north of $54 billion of retained earnings that can cover about 10 years of dividend payments based on the dividends it paid out in the last quarter.
Food for thought
Although dividend stocks can provide higher income for you, their stock prices are volatile and can be unpredictable. Therefore, Canadians should only invest long-term capital — money they don’t need for at least the next five years. The idea is that if these businesses make more money over time, in the long run, their stock prices (and dividends) should head higher as well. Then you’ll be growing your passive income and long-term wealth, even if you don’t invest additional money.
