Last updated by BM on January 03, 2022
Summary
- This article is part of our weekly series (MP Market Review) highlighting the performance and activity from the previous week related to the financial markets and Canadian dividend growth companies we follow on ‘The List’.
- Last week, ‘The List’ was down slightly with a minus -6.0% YTD price return (capital). The dividend growth of ‘The List’ remains at +10.6% YTD, demonstrating the rise in income over the last year.
- Last week, there were no dividend increases from companies on ‘The List’.
- Last week, there were no earnings reports from a company on ‘The List’.
- No companies on ‘The List’ are due to report earnings this week.
- Are you looking to build an income portfolio of your own? When you become a premium subscriber, you get exclusive access to the MP Wealth-Builder Model Portfolio (CDN) and subscriber-only content. Start building real wealth today! Learn More
“…for a lot of people, generating a portion of their income from lightly taxed – or even negatively taxed – dividends makes a lot of sense.”
– John Heinzl, (Negative tax on dividends? Yup, really), Globe & Mail
DGI Truth #5: Dividend growth investing is a tax-efficient strategy
One of the first things you discover when you begin working is how much money is taken off your pay cheque each week for income tax purposes. Eventually, you discover that the more you make, the higher tax rate applies (increasing marginal tax rate). It is then that you start to ask questions; “How do I hold onto a larger share of my income?”
For those looking to hold onto a larger share, generating dividend income may be part of the answer. Dividend income is taxed at a lower rate than many other forms of income due to the dividend tax credit (DTC). To avoid ‘double-dipping’ by the CRA and account for the tax the corporation issuing the dividend has already paid, the individual receiving the dividend is then entitled to a federal and provincial dividend tax credit.
Let’s look at an excerpt from the 2019 example published in the Globe & Mail by John Heinzl:
How to earn $52,000 tax free – no offshore account required
You are a resident of Ontario and have saved $1.3 million. You decide to retire and invest the money in a portfolio of dividend-growth stocks yielding an average of 4%. Your portfolio would generate an annual dividend income of $52,000, which we’re assuming is all received in a non-registered account.
When it’s time to file your tax return, the $52,000 would be listed on your tax slip as the ‘actual amount of eligible dividends’. To understand how dividend taxation works, however, we need to look at two other important numbers on your tax slip: the ‘taxable amount of eligible dividends’ and the federal ‘dividend tax credit for eligible dividends’.
The taxable amount of dividends is calculated by multiplying the actual amount by a ‘gross-up’ factor of 1.38 (38% is the basic federal corporate tax rate for Canadian-controlled corporations). This produces taxable dividends of $71,760. The purpose of the ‘gross up’ is to roughly estimate the pre-tax income the company (or, in this case, companies) would have to earn to pay you the dividend.
In our example, applying these DTC rates to the grossed-up dividend of $71,760 produces a federal DTC of $10,778 and a provincial DTC of $7,176. These amounts, combined with a federal tax credit of $1,810 (15% of the basic personal amount of $12,069), reduce your taxes to zero.
The reason is that before any credits, $71,760 of income would attract a tax of $16,858 but because you receive more than that in tax credits, you pay no tax on the dividend income.
Due to how the dividend tax credit functions, individuals with lower marginal tax rates receive a comparatively bigger benefit from earning income through dividends than individuals with higher marginal tax rates, but both will benefit from the dividend tax credit.
Will 2023 be the year you consider adding tax-efficient dividend income to your income mix?
Note: It is always a good idea to consult a tax professional to determine the most tax-efficient strategies for your specific situation.
Performance of ‘The List’
At the end of the post is a snapshot of ‘The List’ from last Friday’s close. Feel free to click on the ‘The List’ menu item above for a sortable version.
Last week, ‘The List’ was down slightly with a minus -6.0% YTD price return (capital). The dividend growth of ‘The List’ remains at +10.6% YTD, demonstrating the rise in income over the last year.
The best performers last week on ‘The List’ were Enghouse Systems Limited (ENGH-T), up +3.18%; Stella-Jones Inc. (SJ-T), up +1.36%; and Magna (MGA-N), up +1.32%.
Algonquin Power & Utilities (AQN-N) was the worst performer last week, down -3.55%.
Recent News
First Quantum receives final contract for disputed mine, Panama says (Globe & Mail)
https://www.theglobeandmail.com/business/article-panama-first-quantum-final-contract-mine/
What is going on in Panama has caught our attention on several fronts. First, there is the fact that there are geopolitical risks sometimes when you invest in companies. Always pay attention to where companies do business, as this can affect the safety of their earnings and, ultimately, their ability to pay growing dividends.
Secondly, one of the companies on ‘The List’, Franco Nevada (FNV-N), has a large royalty stream with the mine in question owned by First Quantum; Cobre Panama.
The dispute centres around the government of Panama asking for increased payments from First Quantum to continue mining.
If First Quantum agrees to the payment with the Panama government, its stock and earnings will take a hit, but the royalty stream to Franco Nevada will remain unchanged. This is why we prefer royalty companies over miners.
Dividend Increases
Last week, there were no dividend increases from companies on ‘The List’.
Earnings Releases
No companies on ‘The List’ are due to report earnings this week.
Last week, there were no earnings reports from companies on ‘The List’.
Below is a snapshot of ‘The List’ from last Friday’s close. For a sortable version of ‘The List’, please click on The List menu item.
‘The List’ is not intended to be a portfolio others replicate. Rather, its purpose is to provide investment ideas and a real-time illustration of dividend growth investing in action. It is not a ‘Buy List’ nor reflects the composition or returns of our Magic Pants Wealth-Builder (CDN) Portfolios. It is only a starting point for our analysis and discussion of dividend growth investing concepts.
The List (2022)
Last updated by BM on December 30, 2022
*Note: The following graph is wide, you can scroll to the right on your device to see more of the data.
| SYMBOL | COMPANY | YLD | PRICE | YTD % | DIV | YTD % | STREAK |
|---|---|---|---|---|---|---|---|
| AQN-N | Algonquin Power & Utilities | 10.8% | $6.52 | -54.6% | $0.70 | 5.4% | 11 |
| ATD-T | Alimentation Couche-Tard Inc. | 0.8% | $59.50 | 14.2% | $0.47 | 26.2% | 12 |
| BCE-T | Bell Canada | 6.1% | $59.49 | -9.7% | $3.64 | 4.0% | 13 |
| BIP-N | Brookfield Infrastructure Partners | 4.6% | $30.99 | -23.9% | $1.44 | 5.9% | 14 |
| CCL-B-T | CCL Industries | 1.7% | $57.84 | -14.7% | $0.96 | 14.3% | 20 |
| CNR-T | Canadian National Railway | 1.8% | $160.84 | 3.8% | $2.93 | 19.1% | 26 |
| CTC-A-T | Canadian Tire | 4.1% | $141.50 | -22.8% | $5.85 | 21.1% | 11 |
| CU-T | Canadian Utilities Limited | 4.8% | $36.65 | 0.1% | $1.78 | 1.0% | 50 |
| DOL-T | Dollarama Inc. | 0.3% | $79.19 | 24.9% | $0.22 | 9.2% | 11 |
| EMA-T | Emera | 5.2% | $51.75 | -17.3% | $2.68 | 4.1% | 15 |
| ENB-T | Enbridge Inc. | 6.5% | $52.92 | 6.8% | $3.44 | 3.0% | 26 |
| ENGH-T | Enghouse Systems Limited | 2.0% | $35.97 | -21.6% | $0.72 | 16.3% | 15 |
| FNV-N | Franco Nevada | 0.9% | $136.48 | 0.3% | $1.28 | 10.3% | 14 |
| FTS-T | Fortis | 4.0% | $54.18 | -10.4% | $2.17 | 4.3% | 48 |
| IFC-T | Intact Financial | 2.1% | $194.91 | 19.1% | $4.00 | 17.6% | 17 |
| L-T | Loblaws | 1.3% | $119.72 | 16.5% | $1.54 | 12.4% | 10 |
| MGA-N | Magna | 3.2% | $56.18 | -31.1% | $1.80 | 4.7% | 12 |
| MRU-T | Metro | 1.5% | $74.97 | 11.8% | $1.10 | 12.2% | 27 |
| RY-T | Royal Bank of Canada | 3.9% | $127.30 | -7.0% | $4.96 | 14.8% | 11 |
| SJ-T | Stella-Jones Inc. | 1.6% | $48.52 | 19.3% | $0.80 | 11.1% | 17 |
| STN-T | Stantec Inc. | 1.1% | $64.88 | -7.6% | $0.71 | 6.8% | 10 |
| TD-T | TD Bank | 4.1% | $87.67 | -11.8% | $3.56 | 12.7% | 11 |
| TFII-N | TFI International | 1.1% | $100.24 | -9.5% | $1.08 | 12.5% | 11 |
| TIH-T | Toromont Industries | 1.6% | $97.71 | -14.1% | $1.52 | 15.2% | 32 |
| TRP-T | TC Energy Corp. | 6.6% | $53.98 | -9.6% | $3.57 | 4.4% | 21 |
| T-T | Telus | 5.1% | $26.13 | -12.2% | $1.33 | 6.2% | 18 |
| WCN-N | Waste Connections | 0.7% | $132.56 | -1.1% | $0.95 | 11.8% | 12 |
| Averages | 3.2% | -6.0% | 10.6% | 18 |
