Investing Primer: How to get a dividend income or invest in dividend stocks in Canada (overview)

So part of my investing strategy is to get income (passive) on the side from dividends:

“But where do I buy dividends?”

…is a very common question I get. I just want to clear up a few things before I show you how to figure this stuff out for yourself.

Dividends themselves can’t be purchased

Dividends are what a company would pay out on a regular basis (annual, quarterly, even monthly), in cash from its retained earnings to its shareholders.

Not all companies pay dividends, and it is not a good or bad sign that they do or don’t. There are many arguments about dividends and you’ll find fans of either side. I won’t repeat myself, but this is why I personally decided to invest 50% of my money in dividend-paying stocks.

Long story short, you can’t “buy” dividends. You need to buy the stocks or funds that pay dividends.

Where do I find these dividend-paying stocks?

Lots of ways. You can check out the Farmer’s listing here of the 106 dividend-paying stocks in Canada. You can also check out the TSX Canadian Dividend Aristocrats list. You can also do research on your own on any mutual fund or ETF (exchange-traded fund) that has the word “dividend” in it, and check out the holdings it has in each.

Here’s an example: BlackRock’s iShares S&P/TSX Canadian Dividend Aristocrats Index ETF

Click on HOLDINGS

And it will take you to the list of stocks held in that ETF:

Of course, you can tell by the weight %, that it does not add up to 100%, but these are the ones they hold the most of, or their top 10 stocks. Do this for a bunch and then make your own decisions.

Why do the holdings all look the same?

That’s because they are the same, more or less, and diversity isn’t the key word for dividends in Canada.

You’ll notice as I did over time, that most ETFs and funds have the same holdings in Canada. We have limited number of Canadian dividend-paying stocks, which is why Canadian investors dip into the American stocks and buy in $USD to get those dividends (and of course, pay withholding taxes, of which you need to make sure you hold a W8-BEN form for to help reduce your taxation).

What’s a W8-BEN form?

You do not need to do the following for an RRSP or Registered Retirement Income Fund (RRIF) account because it is tax-free under the U.S.-Canada Tax Treaty. You need to do it for all the other accounts though.

1. Immediately fill out a W8-BEN form to lower dividend taxes from 30% to 15%

If you are also a foreign investor (eg. not an American citizen), you should contact your bank / brokerage and fill out a Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding. The IRS withholds 30% (as a tax) on U.S. stocks and index funds that pay out dividends, even on foreign investors. You can get this reduced (potentially) down to 15% if you fill out that W-8 BEN.

It has to be a form requested by your brokerage or bank (e.g. TD Bank), so I suggest contacting them and finding out how to submit this information to the IRS. Otherwise, you’re paying extra U.S. taxes (and letting them use 15% of your money for free) on your dividends earned for nothing during the tax year.

With Questrade (where I now hold most of my investments in index fund ETFs with the occasional stock here and there), I contacted them about this and they wrote back saying:

The W8-BEN form is not required to be completed by individuals to have the withholding tax rate adjusted.

This is because only a valid ID that displays a Canadian address can be used to update the rate. All that you would be required to do is submit to us a copy of your valid Canadian Drivers license for us to adjust your with-holding tax rate.

Done.

2. File for a foreign tax credit on your year-end taxes

When you go to do your taxes, fill out Line 405 – Federal foreign tax credit with Form T2209 so that you claim that remaining 15% you have paid in foreign tax credits.

If you are with Questrade, you can find these foreign taxes paid in Questrade by doing the following:

1. Click on the “My Account”
2. Then on “Account Activity”
3. Select your account (Margin or TFSA) to see your dividends and taxes withheld

Where do I buy these dividend stocks?

Anywhere stocks can be purchased or traded. Your bank/financial institution brokerage, or discount brokerages. For instance, TD Bank has their own platform with the bank itself to buy stocks and ETFs, but they also have TD Waterhouse which is their brokerage sister company.

I am personally with Questrade for everything. They handle it all, $USD, $CAD, RRSP, TFSA, Margin, RESP… it’s just easier to have everything in one spot, and they issue statements every month with your past performance etc:

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Are stocks the only things that pay dividends?

No. ETFs or mutual funds, like index ones, may hold stocks that pay dividends but not all of the companies they hold will pay dividends, ergo, their dividend yield is lower than if you were to buy a dividend-paying stock.

Example: VFV.TO (Vanguard S&P 500 Index ETF) pays out about 1.09% in dividends:

But buying let’s say JNJ (one of the holdings) instead, yields 2.4%

BUT… it doesn’t mean all the dividend paying stocks pay out high dividends, look at AAPL for instance, their yield is 0.61%.

So you can also buy or focus on ETFs or mutual funds that are dividend-focused like BlackRock iShares above.

Just watch out for the Management Expense Ratios (MERs). A lot of these funds that are dividend-focused, tend to have a higher MER cost because you have someone actively managing it to buy/sell dividend stocks in the holdings.

Two things instead of buying dividend-focused ETFs or mutual funds:

1. You could just…. do it yourself and replicate their holdings to save the MERs over a long period of time
2. Simply buy index funds that aren’t dividend focused, but have a lower fee overall

Do I just look for high-paying dividends?

No. What’s the point in getting $0.88 a year if the stock tanks $30? I mean…. You don’t just want to look at what is being paid out, you want to also have it appreciate in capital over time.

How do I know what will go up over time?

And now we circle back to the age-old conundrum of stock picking. You don’t. No one has a crystal ball. In general (though this is not a set rule), the companies with lower dividends TEND to be more stable. They don’t give out more money than they should. The ones with super high dividends, tend to be riskier because they are trying to use dividends to attract you.

So if you go by companies (dividend aristos) that have paid out consistently over the years and have INCREASED over the years, you may be on solid ground there, but again. NO ONE KNOWS.

How do I know how much dividend income will I get?

This one is not as simple, you need to set up a spreadsheet and track it yourself by searching up each ticker symbol fact sheet.

• Stock Ticker (e.g. AAPL)
• # of Shares (e.g. 10)
• Dividend yield (annual) in dollars (e.g. $0.88/year)
• Multiply out # of Shares by the yield (e.g. 10 x $0.88 = $8.80 / year)

…and add it all up, one by one to see the income per year based on the shares held. Also, please note that dividend amounts can change by quarter, or disappear completely, like during the pandemic when a lot of them were halted.

But can’t I just use the dividend yield % to figure it out?

No. Dividend yield percentages are based on the current stock price (example: $149.55 for AAPL). As this price fluctuates during the day and changes, the yield will also change. You need to know the $0.88 / year amount, not the 0.61% example for AAPL

If Apple doubled in stock price over night to $299.10 (or $149.55 x 2), but their dividends stayed at $0.88/year, the yield would drop to 0.58%.

Umm.. but it says 0.61% for AAPL in the picture…

Yes, that refers to the yield from the LAST time it paid out dividends on July 5th 2021 and using the stock price of that date and the time they did it.

How do I reinvest my dividends?

If you do not reinvest your dividends, by taking the cash you get and buying more, you will end up with cash sitting in your account from dividends over the years. You are now invested in CASH and your dividends are no longer working for you. To be able to reinvest the cash you get to buy more of the same stock if you have enough, you need to set up a DRIP – Dividend Reinvestment Plan.

What is a Dividend Reinvestment Plan (DRIP)?

It lets you reinvest the dividends you get, into buying more of the same stock that paid out the money. You can simply ask the brokerage to do it – tell them you want these specific stocks to be on a DRIP. You can pick and choose to take dividends from some in cash and to reinvest it in another stock manually, or to have it do it automatically on a DRIP. Some brokerages don’t even offer this option, so ask.

If you do not get enough in dividend income in the payout that covers buying one full stock, the money stays there in cash. It is also tied or linked to each stock, meaning if you get $50 from AAPL but then you get $50 from JNJ, you get $100, but no new stock is purchased in either AAPL or JNJ. You would just get $100 in cash sitting there, and you have to manually clear out the free cash by withdrawing it to spend, or buying more stocks. You have to have enough in the dividend income FOR THAT STOCK to be able to reinvest and buy more of the same.

You could even play around with this like I do. There are a couple of dividend stocks I want to divest of (for whatever reason – personal, ethical, performance issues..) so I stop the DRIP on them, and I use the dividends I get to buy other dividend stocks I want more of, or ETFs, and once I see the stock at a level I want to sell it at, I divest of the whole holding and use that money elsewhere.

And that’s my primer on dividend investing.

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