How do dividends work in Canada?

James Rodriguez James Rodriguez  updated on 2022-05-13

Did you know that if you invest in certain companies, those companies will pay you simply for being a shareholder of their company?

These companies are known as dividend paying companies and their stocks are call, dividend stocks. The income that they pay to shareholders is known as dividends. If you have $500,000.00 invested in multiple companies averaging annual dividend payments of 4%, you would effectively receive $20,000.00 in annual income, before taxes, just from being a shareholder.

This article covers the basics of dividends, what dividends are, how dividends works and your other questions about these income paying investments. 

What are dividends?

Dividends are the distribution of a portion of a company's profits to eligible shareholders. Most commonly, dividends are paid to shareholders in cash but sometimes they are distributed as extra shares by means of a stock dividend. The amount of dividends that an investor receives is directly related to how many stocks/shares in the company they own. 

It is important to note that not all stocks pay dividends. Instead of sharing profits with shareholders, many companies choose to reinvest earnings back into the company in order to grow.

How do you buy dividend stocks?

There are a few ways to invest in dividend stocks. Just purchase:

Are you ready to add dividend stocks to your investment portfolio? The easiest, most direct way is through an online broker.

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How do dividends work?

Dividends work as an incentive to investors who place their faith and money in a company. In return, if the company pays regular high dividends to shareholders they will receive a steady income and remain a loyal investor. 

Dividend payments are determined by the company’s board of directors who also dictate the dividend rate and payout time-frame. Usually, the dividend is determined based on a company’s profits with a set portion being allocated to shareholders. However, when profits are low a company may still opt to continue paying high dividends to uphold its dividend performance history. 

A dividend is paid per share of stock. For example, if you own 100 shares in a company which has decided to pay its shareholders an annual $2 cash dividend, you will receive $200 in income that year from your 100 shares. 

Dividends from dividend stocks fluctuate and can be as little as 0.1% or as high as 7% of the share price.

How are dividends calculated?

A company’s dividend rate is listed as a dollar value and represents the total amount of dividends paid to investors per share. Due to this, the dividend or dividend rate may also be referred to as dividends per share (DPS). 

If a company’s cash dividend, dividend rate or DPS is $2 per year and paid quarterly, an investor will receive $0.50 each quarter for every share they hold in that company. 

What is dividend rate vs dividend yield?

The dividend rate is a specific dollar value while the dividend yield is expressed as a percentage. As such, the dividend yield represents the ratio of the company’s annual dividend relative to its stock share price. 

In order to calculate the dividend yield, you simply divide the DPS by the company’s current price per share and multiply it by 100. If a company has a dividend rate of $2 and the company’s share price is valued at $80, the dividend yield would be 2.5%. 

Need to calculate the dividend yield? It is easy.

Dividend yield = share price ÷ dividend rate

Why do companies pay dividends?

Companies pay dividends in order to reward current investors and attract new investors. By sharing profits through dividends, investors receive a guaranteed income on their investment in addition to the possibility of earning money through capital gains.

Specifically, when market volatility is high or share prices are decreasing, more investors flock to dividend paying companies simply to get a guaranteed return on their investments. In such instances, the influx of new investors may even cause a company’s stock price to increase due to supply and demand. 

What stocks pay dividends?

Companies that pay dividends are usually well-established and have consistently high profits without the need to reinvest their profits back into the company. As such, they can afford to distribute some profit to investors. Examples of companies who pay dividends are Fortis (FTS), Apple (AAPL), ExxonMobil (XOM), Enbridge (ENB) and Telus Telus (T). Dividend stocks can be found throughout all industries. 

The reason why these companies can afford to pay dividends is that their profits stem from well-established products, services or goods that are unlikely to diminish in value. In addition, the goods and services they offer often don’t need any further development so profits don’t have to be reinvested in the company. 

Not all companies pay dividends. Those that don’t are often growing companies that reinvest profits to develop their goods or services. These companies are often known as growth stocks.

Canada’s best dividend stocks

If you are looking for stocks that pay dividends, Canada has a lot of attractive dividend stocks. When these companies fulfill certain criteria they may become known as Canadian Dividend Aristocrats. In order to become a Canadian Dividend Aristocrat a company has to have a market cap of at least $300 million, increase their dividends for 5 consecutive years, be listed on the Toronto Stock Exchange (TSX), and be a member of S&P Canada BMI. 

To identify a good dividend stock you need to consider many aspects including dividend rate, dividend payout ratio, dividend growth consistency as well as a company’s overall revenue and profitability. Below you can see a list of 10 of Canada’s best dividend stocks considering a few of these factors. 

CompanyTickerAnnual Dividend Rate (CAD)Dividend Payout Ratio
Bank of MontrealBMO5.3238.00%
National Bank of CanadaBNC3.4831.71%
EnbridgeEND3.44116.84%
FortisFTS2.1280.31%
Toronto-Dominion BankTD3.5644.81%
Sun Life Financial IncSLF2.6444.00%
Canadian National Railway CoCNR2.9237.70%
National BankNA3.4825.60%
EmeraEMA2.64130.05%
Royal Bank of CanadaRY4.8042.71%
Canada's top 10 best dividend stocks

Do ETFs pay dividends?

Just like dividend stocks, ETFs (exchange-traded funds) may also pay dividends. In fact, most do. This is because most ETFs include companies that pay dividends to investors and, as the fund is an investor in the dividend paying company, it receives the payout. 

Subsequently, the ETF distributes the dividends to its shareholders in the form of either a cash dividend or additional shares in the ETF. Most ETFs will pay dividends on a quarterly basis. They retains all of the dividends from the underlying stocks during a specific period which is then distributed to shareholders on a specific payment date. 

While nearly all ETFs include a variety of dividend paying stocks, there are ETFs that specifically target and invest in high dividend paying companies. The difference between the two can easily identifiable when the fund’s name includes the word “dividend”.

A few examples of Canada's best dividend ETFs include:

  • iShares Select Dividend (DVY)
  • Vanguard High Dividend Yield (VYM)
  • Schwab US Dividend Equity (SCHD)
  • SPDR S&P Dividend (SDY)

Are you interested in purchasing dividend ETFs? Here is how:

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How often are dividends paid?

Dividends may be paid monthly, quarterly, semi-annually or annually. Quarterly dividend payments are the most frequent. The decision is made by the company’s board of directors which also announces when the dividend is paid, the dividend rate and the ex-dividend rate. 

The ex-dividend date is extremely important and is often missed by beginner investors. The ex-dividend date precedes the actual dividend payment date and it is last possible date where an investor has to be invested in the company in order to be eligible for the dividend payment. 

Should I invest in dividend stocks?

Dividend stocks are often seen as a safe investment because the companies you invest in are often well established and the dividend provides the investor with a guaranteed return. However, investors should be careful painting all dividend stocks with the same brush. Just like any other asset, dividend stocks vary from safe to risky and should be approached with the same caution as every other investment. 

Here are a few advantages and disadvantages to weigh when considering whether to investing in dividend stocks.

Pros of investing in dividend stocks:

  • Dividends may provide a steady income 
  • May also provide a return in stock appreciation
  • Dividend stocks, on average, are less volatile
  • Dividend paying companies are often well-established

Cons of investing in dividend stocks:

  • Dividends aren’t guaranteed
  • Lower potential for large stock increases
  • Extremely high dividends may be detrimental to the underlying company
  • Tax inefficiency

If you’re not sure if investing in dividends is right for you look for a good financial advisor. A financial advisor can help you assess where you are in your investment lifecycle and if investing in dividend stocks is right for you.

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How are dividends taxed in Canada?

Dividends are a great way to earn a steady income from your investments. However, just like any income, dividends are subject to tax which you have to declare on your annual income tax return. The amount of tax you have to pay on a dividend is subject to your individual nominal tax rate and dependent on whether the dividend is a an eligible or non-eligible dividend. 

Taxes can be a confusing topic. You should always speak to your accountant for specific tax advice.

What are eligible vs non eligible dividends?

The taxes a shareholder pays on dividends varies depending on if it is an eligible dividend or a non eligible dividend. Furthermore, dividend tax credits are afforded on your personal taxes depending on eligible vs non eligible dividends. 

Eligible dividends are usually dividends that are received from investments in public companies, or private companies with high earnings and a net income over $500,000. These public and high earning companies pay a higher tax rate on their income and as a result the dividend received by the shareholder is grossed up at a higher rate than for non-eligible dividends. A benefit, however, is that the shareholder also receives a larger federal tax credit to off-set the gross up. 

Conversely, non-eligible dividends are usually received from smaller business that earn less than $500,000 that pay a lower corporate tax rate on their earnings. As a result, the shareholder receives a lesser “gross-up” from non-eligible dividends, but also receive a smaller federal tax credit. 

The “gross-up” on dividends is the corporate tax paid by the company on the income they distribute to shareholders. The purpose of grossing up a shareholders dividends on a tax return is to approximate how much pretax profit the company would have had to earn in order to provide you with your dividend income. 

The tax credit is then applied to the “grossed up” figure in order to off-set the amount of tax that the company would have already paid, which stops double taxation. 

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