Dividend

Dividends are a central concept in the world of investing. For financial advisors, understanding how dividends work and how they can benefit clients is vital. In this article, Wealth Professional Canada will highlight what dividends are and how they are paid. 

Want to learn how you can use strategies to help clients reach their financial goals with dividends? Read on for more. 

Why do companies pay dividends? 

Companies pay dividends for several reasons. One reason is to reward shareholders for investing in the firm. When a company pays a dividend, it shows that it is profitable and confident about its future. 

Paying dividends can also make a company’s stock more attractive to investors. Some investors prefer to receive regular income from their investments, and dividends provide that income. 

Companies might also pay dividends to signal financial health. A company that can pay a steady or growing dividend is often seen as stable. This can help attract long-term investors who are looking for reliable returns. 

How dividends work 

A dividend is a payment made by a corporation to its shareholders. It usually comes from the company’s profits. When a firm earns more money than it needs to run its business, it can choose to share some of that profit with the people who own its stock.  

Dividends are often paid in cash. However, there might be times when companies pay them in the form of additional shares of stock. Watch this video to know more:  

If your clients want to earn from fixed-income instruments, advise them to consider preferred shares, as these can pay regular dividends. 

Are dividends taxable in Canada? 

Short answer: yes. However, dividends from local companies receive special tax treatment through the dividend tax credit, which reduces the amount of tax owed. Dividends from foreign companies are taxed as regular income and do not qualify for this credit. 

Dividend calculator 

To help your clients compute for their dividends, check out our dividend calculator below: 

Unit or share price Number of shares Holding period Annual dividend yield

%

Estimated dividend return

$0

Dividends	$0	0%
Contributions	$0	0%
Growth	$0	0%
Principal	$0	0%

Building a dividend-focused portfolio 

You can help your clients build portfolios that focus on dividend-paying stocks. This can be done by choosing individual stocks or by using mutual funds and exchange-traded funds (ETFs) that invest in dividend-paying companies. 

When selecting dividend stocks, look at several factors: 

• Dividend yield: This is the annual dividend payment divided by the stock price. It shows how much income an investor can expect to receive for each dollar invested. 

• Dividend growth: Some companies increase their dividends over time. This can help protect against inflation and increase income in the future. 

• Payout ratio: This is the percentage of earnings that a company pays out as dividends. A lower payout ratio means the company is keeping more money to reinvest in the business. A very high payout ratio can be a warning sign that the dividend might not be sustainable. 

• Company stability: Look for companies with strong financials and a history of paying dividends. These are more likely to continue paying dividends in the future. 

Dividend ETFs and mutual funds 

Dividend-focused ETFs and mutual funds can be a good option for clients who want to diversify their investments. These funds invest in a basket of dividend-paying stocks. This reduces the risk of relying on a single company for income. 

Some funds focus on high-yield stocks, while others look for companies with a history of growing their dividends. To guide your clients, review the fund’s holdings and fees before making recommendations. You can also assess its performance over the years. 

Dividend reinvestment plans (DRIPs) 

Many Canadian companies offer dividend reinvestment plans, or DRIPs. These allow shareholders to use their dividends to buy more shares of the company automatically. This can be a powerful way to grow wealth over time. 

By reinvesting dividends, investors can buy more shares without having to pay commissions or fees. DRIPs are especially useful for clients who do not need the income right away. Over time, the reinvested dividends can lead to larger holdings and more dividend income in the future. 

Dividend investing 

Dividend investing is a strategy where investors buy shares of companies that pay regular dividends. Their goal is to earn steady income from their investments. These can be used for spending or reinvested to grow their wealth over time. They can also use their dividend earnings: 

To supplement part-time work 

Suppose a client who has reduced their work hours but is not fully retired wants to make up the difference in income. Let’s say that you advise them to invest in dividend-paying stocks with a 3.5 percent average yield. 

With an investment of $200,000, the client receives about $7,000 per year in dividends. This extra income helps cover living expenses without needing to dip into savings. 

To fund annual travel 

Let’s use another example. Imagine you have a client who enjoys traveling every year and wants a reliable way to pay for their trips. If you recommend building a portfolio of dividend stocks that yields four percent annually, the client can receive about $5,000 per year in dividends by investing $125,000. 

This steady income can be used to fund their travel plans. This also makes their vacations more affordable and predictable. 

To support charitable giving 

If a client wants to make regular donations to their favorite charities, you can suggest investing in dividend-paying stocks. With a $100,000 investment, the client can earn about $3,000 per year in dividends if it yields three percent. 

These funds can be donated each year, allowing your client to support causes they care about without reducing their principal investment. 

To build retirement income 

For our last example, suppose a client is close to retirement and wants to receive regular income from their investments. You can advise them to build a portfolio of dividend-paying stocks to achieve this goal. 

Let’s say the stocks have an average dividend yield of four percent and your client invests $500,000. This means that they can expect to receive about $20,000 per year in dividend income. 

If they don't need all the funds right away, they can even reinvest some of their dividend earnings. Over time, this can increase the size of the portfolio and the amount of income it produces. 

Now that you’ve read some sample scenarios showing how dividend investing can support your clients’ goals, watch this video for further insights: 

Do you have clients who want to invest in stocks to earn dividends but are unsure how to get started? Check out this beginner-friendly guide on buying stocks in Canada. 

Useful tools and resources 

There are many tools available to help you research dividend-paying stocks. Most online brokerage platforms provide information about: 

• dividend yields 
• payment history 
• payout ratios 

There are also websites and databases that track dividend growth and provide lists of companies with strong dividend records. You can use these tools to compare different stocks and build portfolios that match your clients’ needs. 

Risks of investing in dividends 

While dividend-paying stocks can be a good choice for many investors, there can still be some pitfalls that your clients should watch out for. Companies can cut or stop paying dividends if their profits fall. This can happen during economic downturns or if the company faces financial trouble. A sudden dividend cut can cause the stock price to drop. 

Dividend-paying stocks are also not immune to market risk. Their prices can go up and down like any other stock. Advise your clients to try diversifying across different sectors and companies to reduce risk. 

Keeping up with changes in dividend policies 

Companies can change their dividend policies at any time. As a financial advisor, you need to keep an eye on news and announcements from the companies in their clients’ portfolios. A dividend cut can be a sign of trouble. On the other hand, a dividend increase can signal strength. 

You should also review portfolios regularly to make sure they still meet your clients’ goals. This might mean rebalancing or replacing stocks that no longer fit the strategy. 

The importance of dividends in client portfolios 

If you want to be a trustworthy financial advisor, you should always explain both the benefits and risks of dividends to your clients. Some might want steady income, while others might prefer to reinvest dividends to grow their wealth. See if their investment approach fits their goals and comfort with risk. 

It is also necessary to explain how dividends are taxed and how they fit into their overall plan. Whether your clients want steady income or to reinvest for growth, dividends can help achieve specific goals and add stability to a well-diversified portfolio. This is especially true with changing market conditions. 

Finally, do you want to attract more clients? Then make sure that you’re knowledgeable about dividends so that you can incorporate them in your investment strategies. 

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