Why Dividends Still Matter in Today’s Market

Dividend-paying companies — frequently found in sectors such as financials, utilities, telecommunications, and energy infrastructure — aim to offer relatively stable distributions. These potential income streams may help mitigate the impact of market volatility on total returns.

At its core, a dividend is a distribution of a portion of a company’s profits to shareholders. When you own shares in a company that pays dividends, you may receive regular income in addition to any potential capital gains from stock price appreciation.

Dividend payments are typically paid on a quarterly basis, though some companies do so monthly or annually. To qualify for a dividend, an investor must own the shares before the ex-dividend date — a key technical timeline that determines who receives the payout.

Eligibility for a dividend depends on a specific schedule. It is important for investors to monitor these dates to understand their entitlements:

• Declaration Date: The date the company announces the dividend amount and schedule.
• Ex-Dividend Date: Generally, an investor must own the shares prior to this date to be eligible for the upcoming payment.
• Record Date: The date used by the company to identify its registered shareholders.
• Payment Date: The date when the distribution is actually credited to eligible accounts.

The decision to pay a dividend is a strategic choice made by a company’s board of directors. While many firms choose to reinvest all profits into growth, those that distribute dividends often do so for several key reasons including:

• Distributing Excess Cash. Mature companies with established operations and stable cash flows may return capital to shareholders when internal reinvestment opportunities are satisfied.
• Communicating Financial Position. A history of consistent or increasing dividends is often used by management to signal confidence in the company’s long-term earnings potential and balance sheet strength.
• Attracting a Diverse Investor Base. Many investors, particularly those in retirement or managing income-focused portfolios, prioritize dividend paying stocks for their potential to provide regular distributions.

When evaluating dividend-paying stocks, investors often look beyond the headline to assess sustainability and growth potential. Key metrics to consider include:

• Dividend Yield. This represents the annual dividend per share divided by the current stock price. While a higher yield can be attractive, it may also reflect a falling share price or indicate higher risk, so it should be considered alongside other factors.
• Payout Ratio. This measures the portion of a company’s earnings paid out as dividends. A lower ratio can suggest the dividend is more sustainable, while an unusually high ratio may signal that the payout could be vulnerable if earnings decline.
• Dividend Track Record. Companies that have consistently maintained or increased dividends over time — often called Dividend Aristocrats or Achievers — can indicate disciplined capital allocation and a commitment to returning value to shareholders.

These metrics may help investors assess not just the size of a dividend, but the reliability and growth potential of the income it provides.

Investors should remain aware that dividends are discretionary. Unlike the interest on a corporate bond, a board of directors can reduce, suspend, or eliminate a dividend at any time based on the company’s financial health or broader economic conditions.

Furthermore, a high dividend yield is not always a sign of strength. A yield trap can occur when a yield appears high only because the stock price has declined significantly, potentially signaling underlying financial distress or a pending dividend cut.

Dividends are never guaranteed. Many companies, particularly in the technology or emerging growth sectors, may prioritize reinvesting profits into research, development, or acquisitions rather than issuing payouts.

The way dividends are taxed depends on the type of account in which they are held.

Registered accounts — such as a registered retirement savings plan (RRSP), tax-free savings account (TFSA), or registered retirement income fund (RRIF) — generally shelter investment income from tax. Dividends earned within these accounts are not subject to annual taxation.

In a non-registered account, Canadian dividends receive preferential tax treatment. Eligible dividends from Canadian companies may qualify for the dividend tax credit, which typically results in a lower effective tax rate than interest income from sources such as GICs or bonds. The exact tax benefit varies by province.

Dividends and interest from U.S. and other foreign investments are generally subject to withholding tax. Under the Canada–U.S. tax treaty, this withholding rate is reduced when the appropriate documentation is on file, lowering the tax on U.S. dividends. Without this treaty benefit, higher withholding rates apply. U.S. dividends earned within an RRSP are generally exempt from U.S. withholding tax.

A stock’s total return includes both capital gains (or losses) and dividend income. One strategy used by long-term investors is the Dividend Reinvestment Plan, where dividends are automatically used to purchase more shares potentially allowing your holdings to compound.

At Qtrade, you can enroll in both Canadian and U.S. DRIPs at no extra cost through your account by selecting the securities you wish to include and activating the program.

For investors building diversified portfolios, dividends are more than a relic — they can be a strategic tool for long-term planning. However, like all investments, dividend-paying stocks carry risk, and investors should ensure their choices align with their personal goals and risk tolerance.