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Beginner guide
Dividends explained
A dividend is a share of a company's profits paid out to its shareholders, usually in cash. Many established companies pay dividends regularly, often every quarter, while others, especially fast-growing ones, pay none and reinvest their profits instead.
How dividends are paid
A company's board decides whether to pay a dividend and how much. The amount is set per share, so if a company declares a $0.50 quarterly dividend and you own 100 shares, you receive $50 that quarter. The money is deposited into your brokerage account.
Dividends aren't guaranteed. A company can raise, cut or stop its dividend at any time, and cuts often happen when business is struggling.
Dividend yield
Dividend yield = annual dividend per share ÷ share price
If a stock pays $2.00 per share a year and trades at $50, its yield is 2 ÷ 50 = 4%. Yield moves with the share price: if the price falls to $40 and the dividend stays the same, the yield rises to 5%.
That's why a very high yield can be a warning sign rather than a bargain. It often means the share price has dropped because investors expect trouble, and possibly a dividend cut.
Payout ratio
Payout ratio = dividends per share ÷ earnings per share
This shows how much of the company's profit is paid out. A company earning $4 per share and paying $2 has a 50% payout ratio. A ratio above 100% means the company is paying out more than it earns, which usually can't last unless profits recover. What counts as a normal payout ratio varies by industry; utilities and pipelines, for example, often pay out more than technology companies. See what is the P/E ratio for more on earnings per share.
The key dates
- Declaration date: the company announces the dividend amount and its dates.
- Ex-dividend date: you must own the shares before this date to receive the dividend. If you buy on or after it, the previous owner gets it.
- Record date: the company checks its records to see who's entitled to the payment.
- Payment date: the dividend is paid into shareholders' accounts.
On the ex-dividend date, the share price typically drops by roughly the dividend amount, because new buyers won't receive it. Buying just before that date doesn't give you free money.
Reinvesting dividends (DRIPs)
Many brokers and companies offer a dividend reinvestment plan, or DRIP, which automatically uses your dividends to buy more shares. Over long periods, reinvested dividends can make up a meaningful part of total returns. The reinvested amounts still count as income for tax purposes in a non-registered account.
How dividends are taxed in Canada
- TFSA: Canadian dividends are tax-free. (US dividends face a 15% US withholding tax that can't be recovered; see how to buy US stocks from Canada.)
- RRSP: dividends aren't taxed while they stay in the account, but withdrawals are taxed as income.
- Non-registered accounts: dividends from Canadian companies generally qualify for the dividend tax credit, which lowers the tax you pay compared with the same amount of interest income. Foreign dividends don't get this credit.
Tax rules are complex and depend on your situation, so check with the CRA or a tax professional.
Dividends and price momentum
StockSignalCheck's charts and scores use closing prices only, so they don't include dividends. For dividend-paying stocks, total return including dividends will be higher than the price change shown.
Keep learning
This guide is for education only. It isn't personalized financial, investment or tax advice, and nothing here is a recommendation to buy or sell any security. Investing involves risk, including the possible loss of your money.