Canadian Dividend Stocks

There are some instances when companies may choose to give stock to their shareholders of record. What may spurn such an act is a situation when the company is not liquid enough, and the cash at hand is allocated for some other purpose. What is distributed to the shareholders in such circumstances is referred to as dividend stocks.

There are some definite advantages associated with dividend stocks. One of the most significant is that dividends help shield investments from inflation. Dividends generally yield at much higher rates compared to the rise of inflation. In the case of the Bank of Canada, for example, it can offer one to three percent bracket with an ideal two percent inflation rate.

Canadian dividend stocks offer the shareholder a growth perspective. The benefits do not just come from the dividend, but also from the growth of stocks’ value. The majority of the dividend stocks may become part of the Dividend Reinvestment Program, which is an equity investment option at a company. The dividends are directly taken to the equity. What happens is that there is a tendency for the shareholder’s position to grow with the increase of both, the stock and dividend.

Note that dividend stocks are not taxed in the same way as regular or interest income. Instead, they enjoy a preferential tax treatment upon declaration. Companies are usually taxed separately, which means that the taxes are deducted from earnings before they are distributed through dividend stocks. In Canada, a corporation can get a tax rebate on some types of dividends distributed among its shareholders. Canadian businesses also enjoy a low tax rate on dividend income from other corporations.

The shareholder may also receive a dividend tax credit. These apply to the dividends that Canadian Dividend Stocksshareholders receive from a corporation in order to get compensated for previous taxes paid out at the corporate level. In essence, the tax rates on dividends amount to 36 percent on the highest tax bracket in Canada, which is still lower than the tax rate on interest income. Thus, Canadian investors tend to prefer dividends.

Most economists agree than reinvested dividends are vital to the returns of the investors. They form a crucial part in the securities valuation and are considered a factor in the analysis of potential investors. Well-managed companies often maintain a balance when it comes to dividend stocks. In Canada, although the blue-chip Canadian companies have tried to cut down on distributions, most still have a payout ratio of less than 60 percent. This rate allows the businesses to maintain dividends even during difficult periods.

An investor should be concerned if a particular company does not pay out dividends, though depending on the reasons. If the analysis indicates that the earnings are invested in other projects that create profit, then this is a sign of a robust business. However, if excessive expenses on unprofitable margins have consumed the dividends, then it is a reason for concern. The lack of corporate dividends may be indicative of problems within the company.