To secure their retirement, Canadians are often looking for ways to replace their job’s income. Dividend stocks can play a key role in generating retirement income. After all, Canadian corporations already paid taxes on their earnings. To prevent double taxation, there’s a Canadian dividend tax credit for eligible Canadian dividends, resulting in lower income taxes for this type of income earned by Canadians.
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Fewer dividends are needed to replace your job’s income
According to Talent.com, the average salary in British Columbia is $77,640 this year. The average tax rate would be about 22.87% for an income tax of about $17,756.27. However, if you were a British Columbian who solely earned $77,640 in eligible Canadian dividends this year, you would only be taxed $395.78 because, essentially, the income tax only starts kicking in in the third tax bracket.
Real-life income situations are much more complex. No matter what, eligible Canadian dividend income is typically taxed at lower rates than your job’s income and interest income if you hold your investments in a non-registered account. So, even before retirement, Canadians should consider building a side income with dividend stocks that pay out eligible Canadian dividends.
Of course, if you have extra room in tax-advantaged accounts like your Tax-Free Savings Account (TFSA), you can hold shares there as well. Holding such dividend stocks in your TFSA will generate tax-free passive income. That said, some Canadians opt to earn interest income in their TFSA because this type of income is taxed at higher rates if earned in a non-registered account.
A high-yield Canadian dividend stock
Enbridge (TSX:ENB) stock is a large energy infrastructure company with a long history of paying dividends. It has paid out dividends for about 70 years. Furthermore, it has increased its dividend for about 27 consecutive years.
Its recent payout ratio was sustainable at about 66% of its distributable cash flow. Management also projects dividend growth of about 3% per year through 2025. It also has the potential of boosting dividend growth to about 5% post-2025.
At $47.49 per share, ENB stock offers a juicy dividend yield of 7.7%, which is attractive for Canadians who prioritize current income. Assuming a 3% growth rate, investors can approximate long-term total returns of about 10-11%.
Do you prefer higher dividend growth?
Some Canadians have decades until retirement. If so, instead of current income, they might prioritize higher dividend growth. A top Canadian energy stock that has a solid track record of high dividend growth is large-cap oil and gas producer Canadian Natural Resources (TSX:CNQ). It has paid an increasing dividend for about 22 consecutive years.
Amazingly, its three-, five-, 10-, 15-, and 20-year dividend-growth rates are all north of 21%, which suggests that management has done a superb job of delivering value to shareholders through economic cycles. Surely enough, it has outperformed the Canadian stock market and the Canadian energy sector in the last 10 years as shown in the graph below.
CNQ, XIU, and XEG Total Return Level data by YCharts
At $84.78 per share, CNQ stock offers a decent dividend yield of 4.7%. Analysts also believe it trades at a discount of about 15%. The stock is more or less sensitive to the changes in the underlying energy prices. So, investors should beware of the above-average volatility of the stock.
