Many Canadian companies generally tend to have higher dividend yields than their peers south of the border. For example, the dividend yield of the benchmark S&P/TSX Composite Index was 3.3% at the end of February relative to just 2.5% for the S&P 500 according to FT market data. Since Canada is mostly a natural resources-based economy, Canadian equity markets are home to hundreds of resource firms in the mining and related sectors. Hence when looking for investment opportunities in Canada, it is wise to avoid the speculative plays such as start-up gold miners, oil exploration companies, etc. and instead focus on the well-established dividend paying stocks. The reason for this suggestion is that unlike in the U.S., dividends account for a substantial portion of the total return of Canadian stocks.
The following charts show the significance of dividend returns in the total returns of the S&P/TSX Composite Index:
Note: Returns shown above are based on Canadian dollars.
Source: The Role of Dividends in Income Portfolios, Practice Essentials Canada, Indexing 201, S&P Dow Jones Indices
Dividends accounted for about one-third of the total returns of the S&P/TSX Composite Index with price appreciation contributing the remaining two-thirds since 1956 as per the research report by Standard & Poor’s. As the above chart shows, from 1956 to 2012 dividends have made up about an astonishing 38% of the total returns of the S&P/TSX Composite Index.
Ten Canadian stocks trading on the US markets with yields of more than 2% are listed below for consideration:
1.Company: TELUS Corp (TU)
Current Dividend Yield: 3.62%
Sector: Telecom
2.Company: BCE Inc (BCE)
Current Dividend Yield: 5.01%
Sector: Telecom
3.Company: Manulife Financial Corp (MFC)
Current Dividend Yield: 3.49%
Sector: Insurance
4.Company: TransCanada Corp (TRP)
Current Dividend Yield: 3.85%
Sector: Oil & Gas Transportation
5.Company: Enbridge Inc (ENB)
Current Dividend Yield: 2.81%
Sector: Oil & Gas Transportation
6.Company: Bank of Novo Scotia (BNS)
Current Dividend Yield: 3.84%
Sector: Banking
7.Company: Bank of Montreal (BMO)
Current Dividend Yield: 4.62%
Sector: Banking
8.Company: Canadian Imperial Bank of Commerce (CM)
Current Dividend Yield: 4.53%
Sector: Banking
9.Company: Royal Bank of Canada (RY)
Current Dividend Yield: 3.95%
Sector: Banking
10.Company: Toronto-Dominion Bank (TD)
Current Dividend Yield: 3.81%
Sector: Banking
Note: Dividend yields noted are as of Mar 1, 2013
It should be noted that Canada gives preferential treatment to stocks held in qualified US retirement accounts such as IRAs with respect to withholding taxes on dividends. Canada does not withhold the usual withholding taxes on dividends from Canadian companies if the stocks are held in these accounts. Hence in addition to high dividend yields offered by Canadian firms, this tax policy provides an added incentive for US investors to invest in Canadian dividend stocks.
Disclosure: Long all five banks noted above.
