Dollars and Sense by David Deacon
Investors hungry for income need to consider dividend income from high quality Canadian corporations. They offer high yields, potential for annual increases and significant tax benefits.
A dividend is a share of a company’s profits, which are passed on to shareholders, usually quarterly. For common shares, the amount of the dividend is determined by the board of directors. As a rule of thumb, companies in reliable but slow-growing industries typically pay higher dividends than companies in competitive, capital-intensive industries, where profits are retained for expansion or research and development. Examples of Canadian companies with attractive and reliable dividends include the banks, utilities and phone companies. As I write this article on Sept. 11, the dividend yield on the shares of Bank of Nova Scotia is 4.1 per cent. Emera, which is the parent of Nova Scotia Power, offers a 4.8 per cent dividend. Bell Aliant’s common shares currently yield 7.3 per cent. I often joke with clients that the dividends from these companies pay for their bank fees, phone bill and electricity bill. That’s not far from the truth.
Many of the most established Canadian companies raise their dividends annually. I was reviewing a portfolio with a client today who purchased Bank of Nova Scotia shares quite a few years ago. The dividend yield at the time of purchase was 4.2 per cent. After many dividend increases, his current yield is 15.6 per cent. Annual dividend increases help to offset the effects of inflation on one’s buying power and tends to dramatically reduce the volatility of the stock. In the case of Bank of Nova Scotia, their share price has almost tripled in the past 10 years. Much of this superior performance can be attributed to the high, and rising, dividend pay out.
The Canadian Dividend Tax Credit is a tax benefit offered by the Canada Revenue Agency (Revenue Canada), which was established as a way to encourage investors to invest in Canadian corporations. As a guideline, investors in the top tax bracket in Nova Scotia will pay 33 cents of tax on $1 of dividend income, compared to paying 50 cents of tax on $1 of interest income from a bond or GIC. (This is a guideline only. Many variables impact the final tax payment for each individual investor).
Of course, buying shares of Canadian corporations needs to be carefully researched, as to which companies to buy and when. Investors should consult with their financial advisors before proceeding. From my experience it is well worth the time.
David Deacon is a portfolio manager with Raymond James Ltd., The views of the author do not necessarily reflect those of Raymond James. This article is for information only.