Canadians can earn favourably taxed income from Canadian corporations that gush out cash and share profits with their shareholders in the form of dividends. Eligible Canadian dividends are taxed at lower rates than your job’s income because earnings are already taxed at the corporate level.
For example, according to TaxTips.ca, if you’re a British Columbian earning $100,000 from your job this year, the next dollar you earn from your job will be taxed at a combined federal and provincial marginal tax rate of 31%. However, if the next dollar you earn is Canadian-eligible dividend income, the combined marginal tax rate is only 5.49%. That is, if you earn dividends in your non-registered or taxable account.
Manulife Financial (TSX:MFC) is one of these companies that you can get your share of dividend income from. Last year, the large-cap stock paid out close to $3 billion in dividend income to its shareholders!
As a shareholder, how much dividend income you receive this year depends on how many shares you own. If you hold 100 Manulife common shares, you will receive $1.60 per share, or $160 in dividend income this year, based on the current quarterly dividend of $0.40 per share. If you’re buying 100 shares at the recent quotation of $35.46 per share, you’re earning $160 on an investment of $3,546 for a dividend yield of 4.5%, assuming you pay no commission fees on your trades, which can be achieved on platforms like Wealthsimple.
The 4.5% yield is smaller than the risk-free, one-year Guaranteed Investment Certificate (GIC) interest rate of about 5%. However, Manulife stock also has price appreciation potential, unlike traditional GICs that offer principal protection. That is, for the greater risk you’re taking in the stock, you could potentially earn higher returns in the long run.
Furthermore, it’s likely that in the foreseeable future, Manulife stock will continue increasing its dividend. The common stock has been increasing its dividend every year since 2014. The life and health insurance business remains sustainably profitable and maintains a healthy payout ratio. Its 10-year dividend growth rate of approximately 10.9% is impressive. Its last dividend hike in February was 9.6%. Its three- and five-year dividend growth rates are 9.3% and 9.9%, respectively. This dividend growth is supported by its adjusted earnings-per-share growth, which increased by close to 10% per year since 2014.
Last year, its payout ratio was sustainable at about 54% of net income and 42% of adjusted earnings. Let’s be more conservative and say that it’s able to maintain this payout ratio and continue to increase its earnings and dividends by about 7% per year. We can approximate long-term returns of roughly 11.5% in the dividend stock, assuming the large-cap stock is fairly valued today.
After a run-up of 38% over the last 12 months, investors should not expect similar price appreciation over the next 12 months. At the recent quotation of $35.46 per share per share, Manulife stock trades at a blended price-to-earnings ratio of about 10. So, it’s not an expensive stock. The value stock’s price appreciation going forward should better align with its earnings growth as much of the valuation expansion has occurred.
