Dividend Investing: Canada’s Complete Guide to Dividend Stocks

Canada’s Complete Guide to Dividend Stocks

A stock share that pays dividends may seem like an attractive approach to begin an investment journey or diversify an existing portfolio. However, investing in dividend stocks do have their own benefits and risks that Canadians need to know.

Deciding to invest will be based on whether a dividend investment strategy aligns with your personal investment goals.

So are you looking to get rich quickly through high-risk, high-return investing? Or are you playing the long game and are seeking longer-term investment gains so you can retire early or increase your savings?

If your investment style is the latter, then dividend investing may be an excellent way to diversify your portfolio. While dividend stock investing is admittedly a slower approach that requires patience, overall, it carries less risk and the potential for high gains over time.

What are Dividend Stocks?

Dividend stocks are stocks that pay you for investing in them, whether on an annual, semi-annual, quarterly, or monthly basis. These dividends are paid out as a portion of the company’s profits.

Paid out regularly, dividends are how investors earn returns from their stock investments. Dividends can be paid as cash or as additional stock in the company. 

Additionally, how often dividends are paid out varies from company to company.

So if you are interested in investing for gains through dividend payouts, you will want to choose dividend stocks to add to your portfolio.

Which Canadian Companies Have Dividend Stocks?

Dividends are more likely to be paid by well-established companies. 

These companies may not allocate as much of their revenue toward reinvesting into their business due to its status. Also, high-growth companies that can include tech or biotech do not often pay dividends. Instead, they are focused on using their profits to expand and grow the business.

For Canadian companies, see this list of Canadian dividend aristocrats. The companies are worth considering as investments, and to be listed, they must meet specific criteria that demonstrate credibility and consistency. For example, the company must show historical data of increased dividends within the first year of the prior five years of review for dividend growth. Other criteria include meeting revenue and valuation thresholds. 

This list is a great place to start, but complete your research beyond the above qualifications to determine if you want to add these investments to your portfolio.

How to Start Investing in Dividend Stocks 

Stocks that pay dividends can provide a stable and growing income stream. Investors typically prefer to invest in companies that offer dividends that show an increase year after year, which helps outpace inflation.

If you are interested in investing in dividend stocks, you should do a few things to get started. 

  • Research: To get started, you want to research dividend stocks to review performance and look for stocks with a history of financial stability and low volatility. These are likely better investment options with a higher likelihood of paying out dividends and increasing year over year. These stocks are often large corporations, and they can handle fluctuations in the market and continue operations even despite a lousy quarter. Create a list of large companies that you may want to own.
  • Read stock quotes: Once you have a shortlist of potential stocks, look at the stock quote to understand all the pertinent information about the stock before deciding to invest. You can also learn more about the dividends in terms of the yield percentage, important dates, etc. Note that the yield is the percentage of the share price payout. You want to pay attention to that percentage and be wary of a yield percentage that seems high. If the percentage appears too high (around 20-30 percent), it may seem tempting, but it may also be too good to be true.
  • Decide how you want to invest: To invest in stocks, you can use a brokerage or purchase directly through the company. However, some stock purchases require a minimum investment. Decide how much you are ready to invest, and then you can sort out which method of investing will be most effective. 

Don’t Forget to Look at the Payout Ratio

One important aspect of investing in dividend stocks to keep in mind is the payout ratio. 

A stock’s payout ratio is the amount of money it pays per share in dividends, divided by its earnings per share, giving you the percentage of earnings the company pays to shareholders. 

When researching stocks, look for a low payout ratio (60% or less). This means the dividend is sustainable and should pay out over the years you hold the stock.

Once you decide how much you want to invest, where you want to invest it, and how you want to invest, you can make your purchase and become a dividend stock investor. 

How do Dividends Work?

In Canada and the United States, companies pay dividends on a regular basis. Some pay every quarter, others pay monthly or semiannually, and some pay discretionary dividends when choosing to pay out their stockholders. However, before dividends are paid, a company’s board of directors must approve each dividend.

To that effect, it is essential to note that there are some dates you should know when you are investing. The important dates include:

  • Trade date: The date the order is requested to purchase the stock shares.
  • Settlement date: The date when the shares are actually in your portfolio, and the transaction is cleared. You don’t necessarily own the stocks the day you purchase and pay for them.
  • Declaration: This is the date when the company announces that there will be a dividend payout.
  • Ex-dividend: You must own shares in the stock before the ex-dividend date to qualify for the dividend payout. If you purchase on the date or after, you will not be eligible to receive the dividend.
  • Payment: The date that the cash will be deposited into brokerage accounts.

Make a note of the dates above and know them before you invest, and keep track of them after investing.

Now that you understand how to invest, let’s tackle how you know how much of a return your investment will yield. Let’s break it down. 

How Dividends are Paid Out to Investors

If you own one share of a dividend stock, the dividend cash payout will be based on the company’s performance and its choice to pay stock owners. The company will pay the yield percentage, and your return will be based on X dollars for X number of shares.

The math could look like this:

  • You own 100 shares of a company you purchased at $10 per share, a $1000 investment. 
  • Annually, each share pays a $0.20 dividend.
  • So throughout the year, you will receive $20 in dividend payments, which is also a 2 percent yield.

When you receive the dividend payment, you can choose what to do, which includes:

  • Reinvest in the company and purchase more shares of the stock.
  • Purchase stock in a different company.
  • Save or spend the money.

The decision on what to do with the gains should be made based on your investment strategy and long-term goals.

Also, keep in mind that dividends are considered taxable income. Even if the payout is reinvested or left within your account, you will be taxed on the gains. The tax amount will depend on whether ordinary dividends or qualified dividends. Qualified dividends receive a better tax implication. The qualification relies on the company’s status and how long you held the stock (which would be more than 60 days before the ex-dividend date). 

Stocks that pay dividends offer your portfolio predictable quarterly payments. However, not every company with dividend stocks can always maintain a payout. But overall, a diversified portfolio of dividend stocks can pay you with some degree of certainty. 

Which Dividend Stocks Should You Buy?

By focusing on strong, solid companies that regularly increase dividends, a small sum of money could grow into something significant. 

Some top dividend stocks to consider as investments include:

  • Proctor & Gamble
  • Pembina Pipeline
  • Brookfield Infrastructure Partners
  • Fortis Inc.
  • Polaris Infrastructure

Remember, once a company establishes a dividend or increases the yield, investors expect it to be maintained, even in tough economic times. Since dividends can indicate a company’s financial health, investors may devalue a stock if they believe the dividend yield percentage will be reduced (which lowers the share price).

Investors who are not interested in researching and choosing individual dividend stocks for investments may seek to invest in dividend mutual funds or dividend exchange-traded funds (ETFs). These funds hold a bundle of dividend stocks within one investment. The funds distribute dividends to investors from those holdings.

Should you buy high-yield dividend stocks? Well, you should be wary of high yields and evaluate a company if the yield seems too good to be true (20-25%). This percentage can be a temporary yield, and the yield may be removed.

Our Foolish Stance on Dividend Investing in Canada

Dividend stocks are long-term investments where growth is due to the power of compounded gains. 

Even the most rock-solid dividend stocks can experience significant volatility over short periods. There are simply too many market forces that can move them up or down over days or weeks, many of which have nothing to do with the underlying business itself.

So while the companies listed above should make great long-term dividend investments, don’t worry too much about day-to-day price movements. Instead, focus on finding companies with excellent businesses, stable income streams, and (preferably) strong dividend track records, and the long term will take care of itself.