No matter how the market is performing, dividends can play a role in your wealth-building efforts. The question is whether to take those payouts in cash or reinvest them.

If you need money now, then taking the cash obviously makes sense. But dividend reinvestment programs can put your investing on autopilot. You don't have to worry about a regular investing schedule on at least a part of your portfolio. It's taken care of for you.

Best of all, reinvesting bolsters the power of compounding: You leave more money in your portfolio to grow free of charge and hassle.

As easy as it may seem, however, you may want to discuss with your financial adviser whether reinvesting is the best option for your goals and current market conditions. Here are four points to consider.

  1. Dividend History. Just because shares pay a dividend doesn't mean they always will. Check out a stock's dividend payment history. Solid candidates are companies with a history of raising their dividends or at least paying a dividend every year.
  2. Behind the Yield. All dividend-paying stocks are obviously not equal. Many shares with high yields are sound investments, but you may find companies that aren't performing well that offer higher yields to attract investors. If the company takes a hit, the stock price could plummet. The money you lose could more than outweigh the benefits of any dividends you received.
  3. Price Matters. Watch the stock's price. High yields can seem attractive in a low-interest environment, but if you're buying the shares at close to their trading high for the year, you can lose money once the business cycle changes and the price drops. If the future price of the shares is a concern, try buying a partial position now and buy more when the price is more reasonable.
  4. Flexibility. If you want your portfolio to grow painlessly over the years, reinvesting dividends makes sense. On the other hand, if you want current income, taking payouts works better. Dividend reinvesting gives you the flexibility to do both. If you need the money one year, or think the share price is too high and you want to reinvest later at a better price, you can opt out of the reinvestment. Then you can switch back later.
Dividend Bonus

If you receive dividends from taxable Canadian corporations, you can claim a tax credit. This credit exists to prevent double taxation.

Because dividends are paid out of a corporation's after-tax income, they have already been taxed at the corporate level. So a dividend tax credit is available to the investor who receives the dividend, to offset some or all of the corporate tax paid.

How much is it worth? The exact amount depends on your income bracket, provincial tax rate and other factors.

For more information:

Joe Havas, CPA, CA, FEA
Partner
Tel: 514-842-3911 ext 231

Email: .