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The Importance of Dividends

The Importance of Dividends

Learn more about dividends

Overview

An important part of your investment return is dividends. Usually a cash payment to shareholders, dividends are most often paid on a quarterly basis. When the performance of dividend-paying stocks is compared to non-dividend-paying stocks, the difference from a total return perspective (capital appreciation + dividends) can be quite surprising. But keep in mind that not all companies pay out dividends. Some keep all of their profit and reinvest it back into the company, while others pay out a portion to shareholders.

Benefits of Dividends

It is important for investors to consider the benefits that dividends offer and how easy it is to include dividend-paying stocks in any portfolio. Dividend paying stocks offer numerous advantages, including:

  • Attractive Returns: Dividends paid are part of total return. Companies that pay dividends are usually historically stable.
  • Less Volatility: Dividends help lessen the potential fall of a company’s stock price, thereby reducing volatility.
  • Increased Yield: Dividends provide income (however they are only a small part of an investment’s total return).
  • Favourable Tax Treatment: Canadian dividends receive more favourable tax treatment than interest income, which is fully taxed like employment income.

Companies that manage their cash flow effectively tend to sustain and grow their dividend payouts over time. Successful growth of earnings usually pays off for investors in the form of higher share prices.

Dividend Timeline

Dividends must be declared by a company’s Board of Directors before they are paid out -- this is known as the declaration date or announcement date.

A stock is said to trade cum dividend (with dividend) before the ex-dividend date, meaning investors will receive the dividend if they own the stock before this date. The ex-dividend date is usually set two days before the date of record; this allows all stock trades made on previous dates to be properly settled and the shareholder list on the date of record to accurately reflect the current owners.

On the record date, a company determines its shareholders or "holders of record."

The payment date is when the dividend cheques are mailed to the shareholders of a company (or their brokers).

If, for example, the ex-dividend date is March 30, you will receive the dividend if you bought a dividend paying stock on March 29, but not if you bought the stock on March 30.

This calendar shows that the ex-dividend date is set two days before the date of record.

Dividend Reinvestment Plan

What is it?
  • RBC Direct Investing automatically reinvests the dividends you earn, purchasing shares on your behalf in the same companies.
How it works
  • Dividends from eligible Canadian and U.S. corporations are automatically reinvested into whole shares. RBC Direct Investing offers over 500 securities to choose from; all dividend-paying securities listed in the S&P/TSX composite index are eligible.
Save money
  • When dividends are reinvested through the plan, no fees or commissions apply. Shares are purchased on the market (prior to pay date) and booked into your account on the pay date whenever possible. Reinvesting dividends means you purchase more shares in companies that are doing well enough to pay dividends in the first place. By reinvesting dividends that are paid regularly, you are also able to take advantage of dollar-cost averaging.

RBC Direct Investing takes care of all the details for you – from dividend collection to reinvestment. If you would like to enrol in the Dividend Reinvestment Plan, you can do so by checking the box on our online form when you sign up for a new account:

Example of Dividend Reinvestment Plan in Account Open Application

If you are already a client, please call us at 1 800 769-2560, option 4.

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