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How to Invest in Dividend Stocks in Canada [2024]

How to Invest in Dividend Stocks in Canada
Bogdan Stojkov

Summary: Investing in dividend stocks in Canada can be a smart and rewarding way to grow your wealth, as they offer an opportunity to receive regular income payments while also benefiting from potential capital appreciation. One of the most convenient ways to invest in dividend stocks is through regulated brokerages like Interactive Brokers.

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What are dividend stocks?

Dividend stocks, also known as income stocks, are shares of companies that regularly distribute a portion of their profits back to their shareholders in the form of dividends. These dividends serve as a share in the company’s earnings and provide investors with a steady stream of income on top of any potential capital appreciation.

That said, it’s key to understand the following aspects of dividend stocks:

  • How dividends are paid: Dividends are typically paid out to shareholders regularly, commonly quarterly or annually;
  • Dividend yield: The dividend yield is calculated by dividing the annual dividend payment per share by the stock’s current price and expressing the result as a percentage. A higher dividend yield indicates a more attractive return on your investment, as it represents a larger portion of your initial investment returned to you through dividends;
  • Dividend payout ratio: Companies that consistently pay dividends tend to be more mature and established, with reliable cash flows and a long-standing track record of success;
  • Tax advantages of dividend stocks in Canada: In Canada, dividend stocks come with unique tax advantages. The Canadian government offers a Dividend Tax Credit (DTC) to eligible shareholders, which reduces the amount of income tax paid on dividends received;
  • Dividend reinvestment plans (DRIPs): DRIPs allow investors to automatically reinvest their dividends back into the same company’s stock, purchasing additional shares. This process allows for compounding returns, as the newly acquired shares can also generate dividends, further accelerating wealth growth over time.

Who can invest in dividend stocks in Canada?

In Canada, dividend stocks are available for investment to a wide range of individuals and entities. Generally, anyone who meets the legal requirements for investing in the stock market can also invest in dividend stocks.

Common categories of investors who can participate in the Canadian dividend stock market include:

How to invest in dividend stocks in Canada: Step-by-step

To start investing in dividend stocks in Canada, you can follow our step-by-step guide. It’s simple yet effective, making it convenient for any individual or entity looking to enter the Canadian dividend stock market. Here’s how it goes:

Step 1: Open a brokerage account

Opening an account on an online brokerage platform is a straightforward and convenient process. The setup is usually quick and doesn’t necessitate immediate funding.

Unlike swing or other highly active trading styles, dividend investing adopts a more passive approach, making most online brokers suitable for this investment strategy. Typically, dividend investing involves acquiring and holding positions for the long term, rather than engaging in frequent trading activities.

The most convenient way to invest in dividend stocks in Canada is through a regulated online brokerage service, such as our broker-of-choice, Interactive Brokers that offers:

  • Low commissions and financing rates to maximize returns;
  • Global access to stocks, futures, cryptocurrencies, bonds, and funds;
  • Trading efficiency with high-end technology;
  • Secure trading experience.

Best Platform for Worldwide Stock Trading & Investing

  • Highly trusted multi-asset broker with clients in over 200 countries

  • Trade on 150 markets globally from a single platform (stocks, ETFs, futures, currencies, crypto & more)

  • Low commissions starting at $0 with no platform fees or account minimums

  • Easily fund your account and trade assets in 26 currencies

  • IBKR pays up to 4.58% interest on cash balances of $10k or more

Up to 4.58% interest on balance*

Step 2: Fund your account

After successfully setting up your account, proceed to deposit funds into it. Canadian exchanges typically provide a range of deposit methods, such as bank transfers, Interac e-Transfers, and debit or credit card payments. So, choose the option that suits you best, and carefully follow the exchange’s instructions to complete the deposit process.

Step 3: Choose dividend stocks

With your account funded, the next step will be picking the dividend stocks that you want to invest in. To do so, you should consider several things, including:

  • Research companies: Look for well-established companies with a history of consistent dividend payments. Consider factors like financial health, earnings growth, and leadership stability;
  • Check dividend yield: Compare the dividend yield of different stocks;
  • Assess dividend payout ratio: Evaluate the company’s dividend payout ratio, which indicates the percentage of earnings paid out as dividends. Aim for a sustainable payout ratio, typically below 75%;
  • Diversify your portfolio: Build a diversified portfolio by investing in dividend stocks from various industries, as spreading your investments reduces risk and enhances potential returns;
  • Make informed decisions: Check financial news, analyst reports, and reliable online resources to make well-informed decisions.

Step 4: Monitor your investment

Smart and responsible investing in dividend stocks doesn’t stop once you acquire them. Instead, it leads to the next step, monitoring your investment. The best way to do so is to make sure you:

  • Set a schedule: Allocate specific times, such as quarterly or annually, to review your portfolio’s performance and make necessary adjustments;
  • Track dividend payments: Keep track of the dividends received from each stock and verify that the amounts match your expectations;
  • Review diversification: Confirm that your portfolio remains adequately diversified across various sectors to manage risk effectively.

Step 5: Receive dividends

As mentioned, dividends are typically paid out regularly, such as quarterly or annually. Once you receive dividends, you have two options: 

  • Reinvest dividends: The first one is to reinvest your dividends by considering enrolling in a DRIP to automatically reinvest your dividends to purchase more shares;
  • Withdraw dividends: On the other hand, you can also withdraw your dividends. This alternative option involves withdrawing the dividends as cash for personal use or reinvesting in other opportunities.

Prominent dividend stocks

  • Dream Industrial REIT is a real estate investment trust that focuses on owning and operating industrial properties. It provides consistent dividends to investors by generating rental income from its diversified portfolio of warehouses and distribution centers;
  • TD Bank is a leading Canadian financial institution known for its stable dividends. As one of the largest banks in North America, it offers a range of financial services and products to customers, contributing to its reputation as a reliable dividend stock;
  • Manulife Financial is a global insurance and financial services company that offers life insurance, investment products, and retirement solutions. It’s recognized for its dividend payments and its presence in both domestic and international markets;
  • Tourmaline Oil is a Canadian energy company focused on natural gas and oil exploration and production. It offers dividends to shareholders based on its operations in the energy sector and its efforts to maintain sustainable production levels;
  • Cenovus Energy is an integrated energy company specializing in oil sands and conventional oil production. Known for its dividend payouts, the company’s financial performance is closely tied to oil prices and its ability to manage production costs effectively.

Pros and cons of investing in dividend stocks in Canada

Pros

Pros

  • Steady income stream: Regular dividend payments can be particularly beneficial for retirees or those seeking passive income;
  • Potential for long-term growth: Many dividend-paying companies are established and financially stable, which can lead to potential long-term capital appreciation in addition to the income generated from dividends;
  • Tax advantages: In Canada, eligible investors may benefit from the DTC, reducing the tax burden on dividend income and making dividend stocks a tax-efficient investment option;
  • Lower volatility: Dividend-paying companies tend to be more stable and less volatile compared to growth stocks, providing a buffer during market downturns;
  • Potential for dividend growth: Some dividend stocks have a history of increasing dividends over time, protecting investors against inflation and enhancing their purchasing power.
Cons

Cons

  • Limited growth potential: While dividend stocks can provide a steady income stream, they might not offer the same level of growth potential as high-growth or tech-oriented stocks;
  • Interest rate sensitivity: When interest rates rise, dividend stocks may become less attractive compared to other fixed-income investments;
  • Company-specific risks: Even dividend-paying companies can face financial difficulties, leading to reduced or suspended dividend payments;
  • Dividend cuts: In adverse economic conditions, companies may reduce or eliminate dividends to conserve cash, affecting the expected income for investors;
  • Opportunity cost: Choosing dividend stocks over other investment opportunities means potentially missing out on capital gains from growth-oriented stocks.

What to avoid when investing in dividend stocks in Canada

When investing in dividend stocks, it’s essential to be aware of potential pitfalls to avoid making costly mistakes. Here are some key things to steer clear of:

  • Chasing extremely high yields: Be cautious of dividend stocks with excessively high yields. Such yields may be unsustainable or indicative of underlying issues with the company’s financial health. Instead, focus on a balance between attractive yields and the company’s stability;
  • Ignoring dividend payout ratio: Neglecting to assess the dividend payout ratio can lead to investing in companies that distribute an unsustainable portion of their earnings as dividends;
  • Failing to diversify: Relying too heavily on a few dividend stocks or investing in a single industry can expose your portfolio to undue risk. So, diversify across various sectors and companies to mitigate the impact of adverse market movements;
  • Overlooking financial health: Neglecting to analyze the financial health of a company can result in investing in poorly performing or financially distressed businesses.

Disclaimer: The content on this site should not be considered investment advice. Investing is speculative. When investing, your capital is at risk.

FAQs about how to invest in dividend stocks in Canada

What are dividend stocks?

Dividend stocks are shares of companies that regularly distribute a portion of their profits to shareholders in the form of dividends.

Who can invest in dividend stocks in Canada?

Dividend stocks in Canada are available for investment to a wide range of individuals and entities. These include Canadian residents, non-residents, corporations, trusts, and pension funds.

How to invest in dividend stocks in Canada?

To invest in dividend stocks in Canada, you must first open a brokerage account (e.g., Interactive Brokers). Once you do so, you should fund it, research and select dividend-paying companies, monitor your investment regularly, and receive dividends from your chosen stocks.

Best Platform for Worldwide Stock Trading & Investing

  • Highly trusted multi-asset broker with clients in over 200 countries

  • Trade on 150 markets globally from a single platform (stocks, ETFs, futures, currencies, crypto & more)

  • Low commissions starting at $0 with no platform fees or account minimums

  • Easily fund your account and trade assets in 26 currencies

  • IBKR pays up to 4.58% interest on cash balances of $10k or more

Up to 4.58% interest on balance*

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