What is a dividend?

There are two main ways to make money by investing in stocks: by making a profit when the price of a stock increases in value, and by receiving dividends. But what are dividends, why do companies pay them and what benefits do they add to your portfolio? Keep reading to find out.

What is a dividend in simple terms?

A dividend is a payment from a company to its shareholders. If you own shares in a company that makes a profit, the company may decide to share a portion of that profit with its shareholders in the form of a dividend payment.

Dividends are usually paid in cash, but companies can also offer dividends in the form of stocks or property. The size of the dividend you receive depends on the number of shares you own. The more shares you own, the bigger your dividend payment will be.

When do companies pay dividends?

Many companies pay dividends quarterly, but some pay them monthly, half yearly or annually. Companies may also offer one-off payments known as special dividends. These are typically larger than the normal dividends the company pays out, and they may be issued when the company achieves higher-than-normal profits across a certain period.

But not all companies pay dividends. Just because you own shares in a company, that doesn’t necessarily mean you will be entitled to any dividend payments.

Why would a company pay dividends?

Companies pay dividends to share profits with shareholders. It’s a way of rewarding investors for putting up their own money to support the company.

Of course, it also has the benefit of making the stock a more appealing investment. When investors are choosing stocks, a company that has a track record of delivering consistent dividends becomes a more attractive prospect, so paying dividends can increase demand for the company’s stock and attract more investors.

That said, it’s not a mandatory requirement for companies to pay dividends to shareholders. They can choose to reinvest profits into the business instead, which can in turn reward investors with the growth of the business and an increase in the stock price.

How are dividends calculated?

The dividend payment you receive will depend on two factors:

• The dividend the company pays per share.
• The number of shares you own.

To calculate your dividend, multiply the dividend amount by the number of shares you own. Let’s say a company is paying a $0.50 dividend per share:

• If you own 500 shares, you will receive a payment of $250 (500 x 0.50).
• If you own 1,000 shares, you will receive a payment of $500 (1,000 x 0.50).

Examples of Canadian companies that have paid dividends

Dividends are generally paid out by well-established, stable companies, and many blue-chip stocks have a history of paying consistent dividends. Growth companies are less likely to pay dividends — their focus is often on reinvesting profits back into the business instead.

The Royal Bank of Canada (RBC) is one well-known example of a Canadian dividend-paying company. It distributes dividends to shareholders on a quarterly basis, with payments made in February, May, August and November.

In November 2025, RBC will pay a dividend of $1.54 per share. So if you own 200 RBC shares, you will receive a dividend payment of $308 (200 x 1.54).

We’ve compiled a list of large Canadian companies that pay dividends here:

• Agnico Eagle Mines
• Bank of Montreal
• Bank of Nova Scotia
• Barrick Gold
• Brookfield Corporation
• Canadian Imperial Bank of Commerce
• Canadian National Railway
• Canadian Natural Resources
• Canadian Utilities
• Enbridge
• Fortis
• Manulife Financial
• Royal Bank of Canada
• Sun Life Financial
• Thomson Reuters
• Toronto-Dominion Bank
• Whitecap Resources

Dividend dates to watch out for

There are a few key dividend dates you need to be aware of:

• Announcement date (or declaration date). This is the date when the company announces a dividend payment. The dividend will need to get the OK from shareholders before it can be issued.
• Ex-dividend date. In order to receive a company’s dividend payment, you must hold the shares prior to its ex-dividend date. If you buy shares on or after an ex-dividend date, you won’t receive this dividend, but you will be eligible for the next dividend payment, if there is one.
• Record date. This is the date on which you must be listed on the company’s books as an investor in order to qualify for a dividend. It’s usually one business day after the ex-dividend date.
• Payment date. This is the date when you will receive the dividend payment.

What is a dividend reinvestment plan?

Some companies offer what is called a dividend reinvestment plan (known as a DRIP). If you opt in to a DRIP, you can use your dividends to buy more shares in the company instead of receiving the dividend payment in your bank account.

There are several advantages of doing this, but the main one is that you’re able to use the money to buy more shares without paying any brokerage fees. It’s also an easy, passive way to gradually increase your position in a company over time with little to no effort. It’s a good set-and-forget investment strategy: once you opt in, it all happens in the background automatically.

But there are downsides. Not only do you miss out on using dividends as a source of income, but you also don’t get to choose the price at which you buy more shares. The shares are instead automatically bought on your behalf on the date of the dividend payment.

Why invest in dividend stocks?

The biggest benefit of investing in stocks that pay dividends is that they provide passive income. Unlike an active strategy like day trading, once you’ve bought your stocks, you don’t have to lift a finger to receive regular dividend payments into your bank account. This steady source of income can be particularly helpful for retirees.

Alternatively, you can use dividends to increase your investment with a dividend reinvestment plan. Like a savings account that pays interest on your interest, a DRIP allows you to compound your returns.

Dividend stocks also offer protection from stock market volatility. While stock prices are always fluctuating, established companies that pay dividends offer stability to help you ride out any market downturns. Best of all, you can also take advantage of the growth in value of a stock over the long-term.

How to choose dividend stocks

Comparing a range of options to try to find the best dividend stocks? Ask yourself the following questions.

• How often are dividends paid? Some companies pay dividends monthly or quarterly, while others only pay once per year.
• Have dividends been confirmed? Companies will often confirm their dividend payments for the year ahead in advance.
• Are dividends growing in value? Take a look back at the dividends paid by each company over previous years. If the value of the dividend has gradually increased, this is a good sign the company is growing and could continue to increase its dividend.
• What’s the dividend yield? Is the yield higher than what you could earn with a high interest savings account?
• What shape is the company in as a whole? It’s important to look beyond the dividend yield and evaluate the company’s overall financial position. Is it an established company with a reliable business model? What are its revenue, cash flow and profit figures?

Do I pay taxes on dividends?

Yes, you will pay tax on the dividends you receive in Canada. You’ll need to declare your dividend income on your annual tax return.

However, how much tax you pay varies depending on whether you receive eligible or non-eligible dividends:

• Eligible dividends are typically paid out by large publicly-traded companies that are taxed at general corporate tax rates. A 15% federal dividend tax credit allows you to reduce the tax you pay on eligible dividends.
• Non-eligible dividends are generally paid by smaller companies that pay tax at a lower rate. They qualify for a federal dividend tax credit of 9%.

The amount of tax you pay will also depend on:

• How much dividend income you receive.
• The provincial tax rates that apply where you live.
• Your total taxable income and your tax bracket.

Are there any disadvantages of dividends?

While dividends offer benefits to investors, there are also a few criticisms to be aware of.

• Is there a better use for profits? Some argue that rather than distributing a portion of profits to shareholders, companies should instead reinvest those funds back into the business. This injection of profits could help the company grow, expand and improve, which could in turn reward investors with a stock price that continues to rise.
• Dividend traps. A dividend trap is when you invest in a particular stock simply because it has a high dividend yield. A high yield could be the result of a decreasing stock price, so paying high future dividends simply may not be sustainable for the company.
• There are lower-risk passive income strategies. If you’re looking for a reliable source of passive income, there are several options to consider other than dividend stocks. Bonds, GICs and high interest savings accounts can provide interest income with a much lower level of risk than if you invest in stocks.
• Not guaranteed. Remember, dividends aren’t a guaranteed source of income — companies can reduce dividend amounts and even stop paying them altogether. The price of the stock will also generally drop after the ex-dividend date, reflecting the fact that new investors won’t be eligible for the dividend.

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Dividends glossary

When researching dividend stocks, you’ll come across some confusing terminology and jargon. Check the definitions below of some key dividend-related metrics that are very useful when comparing dividend stocks.

Dividend coverage ratio

The dividend coverage ratio (DCR) indicates the number of times a company can pay dividends using its net income. You can calculate this ratio by dividing the company’s annual net income by the total dividend paid to shareholders during that period. A high DCR means a company is in a strong and stable financial position and that it has sufficient earnings to offer sustainable dividend payouts.

Dividend growth rate

The dividend growth rate (DGR) is a percentage that shows the annual growth of a company’s dividend payments across a period of time. You can use it to check whether a stock has a sustained history of increasing dividends.

Dividend payout ratio

This ratio indicates the percentage of a company’s net income that is paid to shareholders as dividends. You can calculate the dividend payout ratio by dividing the dividends per share by the earnings per share for the same period.

Dividend per share

Dividend per share (DPS) specifies the total dividend you receive over a year for each share you own. You can calculate it by dividing the total amount of dividends paid by the number of outstanding shares.

Dividend yield

Expressed as a percentage, the dividend yield is an indication of the value of the dividend payment in relation to the cost of the shares. It is calculated by determining what percentage of the share price is returned to the investor as income. So if a company has a share price of $2 and pays a dividend of $0.05, its dividend yield is 2.5%.

The dividend yield helps investors compare similar companies, as it gives you an idea of which one offers a better return on your money in the form of a dividend.

Bottom line

Companies use dividends to distribute profits to shareholders. Investing in dividend stocks allows you to generate passive income while also potentially profiting from the increase in the stock’s price over time. Make sure you compare a range of dividend stocks before deciding where to invest, and compare online trading platforms before choosing a stock broker.

Frequently asked questions about dividends

• Do all companies pay dividends?

  No. There is no obligation for a company to pay dividends to shareholders. Instead, many smaller, newer companies will reinvest any profits made back into the company to help it grow. This still offers potential benefits for investors because if the company is growing, the value of its shares will grow too.

  It's also important to note that dividends are never guaranteed. Each company decides what the value of the dividend will be and if there will even be a dividend payment at all. So just because a company pays a large dividend one year, it doesn't mean it will do this again the following year.

• Does a high dividend payout mean a company is performing well?

  Not necessarily. While a large dividend can indicate that the company is in a strong financial position, it doesn't guarantee that the company will continue to pay consistent dividends. You'll need to consider a company's overall financial position and future prospects, not just its dividend yield, before deciding if it's a good investment.

• What is an example of a dividend?

  Let's say Company XYZ is offering its shareholders a dividend payment of $0.05 for each share they hold. If you own 1,000 shares, you'll receive a dividend of $50 (1,000 x 0.05). But if you own 10,000 shares, your dividend payment will be much larger at $500 (10,000 x 0.05).

• Do ETFs pay dividends?

  Yes, ETFs can pay dividends to shareholders. If an ETF holds shares in companies that pay dividends, the fund will receive those dividends. It will then either distribute those dividends to ETF shareholders, or reinvest them in the ETF through a distribution reinvestment plan.

• Can I earn dividends from foreign stocks?

  Yes, foreign stocks also pay dividends. However, you'll need to consider your tax obligations for foreign stock dividends, while it's also worth mentioning that foreign stocks are not eligible for the federal dividend tax credit.

Written by

Tim Falk

Writer

Tim Falk is a freelance writer for Finder. Over the course of his 15-year writing career, he has reported on a wide range of personal finance topics. Whether you're investing in stocks and ETFs, comparing savings accounts or choosing a credit card, Tim wants to make it easier for you to understand. When he’s not staring at his computer, you can usually find him exploring the great outdoors. See full bio

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