These daily financial tips are designed to be short ideas covering different aspects of family and business finances. They are short pieces intended to provide information to enable individuals, families and businesses to make informed financial decisions. Not all tips will apply to every situation, but over the course of a year, most financial topics will be covered. Check in regularly and share with friends and associates.
Today we will discuss dividends as a source of investment income. Dividends represent a portion of a company’s profits. This portion of a company’s profits are shared or paid out to the shareholders (owners of the company shares) based on the number of shares they own in the company. How often dividends are paid out is determined on the type of shares held (there are common shares and preferred shares in most cases) and what the company dividend payment policy is. In many/most cases, dividends are paid out quarterly, however they may be less frequent (ie. annually) in some cases. Companies are only obligated to pay out dividends should they generate a profit. So dividend payments are not as guaranteed a source of investment income as say GIC interest income. In many cases, most large publicly traded companies have a solid track record of regular quarterly payouts. The amount of the dividends may also vary (are not guaranteed) although in many cases most large publicly traded corporations prescribe what their quarterly dividend payments will be.
For non-registered accounts, dividend income receives more preferential tax treatment than interest income. The calculation is a bit more complex. For regular dividend income the amount of tax payable is calculated as follows: For 2016, dividends designated as eligible dividends are subject to a dividend gross-up of 38% and a federal dividend tax credit equal to 20.73% of the actual dividend. Eligible dividends taxed at the top marginal rate are subject to federal income tax of 24.81% in 2016.
For complete details, consult with the Canada Revenue Agency website or a tax specialist. While the calculation may be more detailed, the essence is due to the dividend tax credit, the amount of tax payable is generally less than interest income which is 100% taxed as taxable income. The trade off is that dividend income is not as secure or guaranteed as interest income.
To determine whether dividend income should be or how much dividend income should be part of your investment strategy, it is best to consult with an investment specialist, Certified Financial Planner or tax specialist. Everyone’s situation is different.
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