Dividends are payments made by publicly traded companies to their shareholders. But beyond the dictionary definition, a dividend paying stock can be an important tool for growing an investment portfolio, particularly if you opt to reinvest your dividends to buy additional stock shares.
Dividend payments can provide income for shareholders of all ages. And financial planners say they’re particularly helpful for retirees because these regular payments can supplement cash flow from government programs like Old Age Security (OAS) and the Canada Pension Plan (CPP) — as well as workplace or personal retirement savings.
Since 2022, the Bank of Canada (BoC) has raised interest rates from 0.25% to 5.0% (in March and April 2024), before holding its overnight target interest rate at 2.75%, as of July 30, 2025. A shift in interest rates can impact the appeal of dividend paying stock — but knowing how interest rates impact the attractiveness of dividends and when to included dividend paying stocks as a tool to grow your portfolio is part of financial literacy that every investor should learn.
Current dividend yields in Canada
As of 2025, Canada’s big banks — RBC, TD, and Scotiabank — offer dividend yields in the range of 4% to 5%, while utilities like Fortis and BCE provide divident yields of 5% to 6%, according to Yahoo Finance. These dividend paying stocks are good benchmarks for every investor, as these equities are core holdings for many Canadian dividend investors.
Big banks also offer a way for investors to get access to dividend stocks
In addition to paying dividends, Canada’s major banks also provide investors with the tools to start dividend investing. Through their online brokerage platforms — such as RBC Direct Investing, TD Direct Investing, BMO InvestorLine, and CIBC Investor’s Edge — investors can open accounts to buy and sell dividend-paying stocks or ETFs.
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Many of these platforms also offer DRIP (Dividend Reinvestment Plans), which automatically reinvest cash dividends into additional shares, helping portfolios grow faster over time. For Canadians who prefer to keep their investing and banking under one roof, these accounts provide convenient access to dividend opportunities alongside everyday financial services.
How dividends are paid
Dividends are paid on a regular basis, often quarterly, to share profits with stockholders. They can be paid out as either cash or in the form of additional stock.
Shareholders will receive a dollar amount or percentage for each share they own. For example, if the company pays a $1.50 cash dividend per share, per year, and you own 40 shares, you’ll receive $60 over the year ($1.50 x 40 = $60).
Dividends can be a win-win for investors and companies
Not every company pays shareholder dividends — a lot of them hold onto their profits and reinvest in the company instead.
Shareholders who want to receive dividends need to buy the stock before what’s called the ex-dividend date — essentially a cutoff date that ensures they’re eligible for the payments. Shareholders who might be considering selling their stock shares must hold them until the ex-dividend date if they want to receive their dividends.
The dividend yield, the amount a company pays out per share, is set by the board of directors, which also has to approve every dividend payment.
There are two main reasons for companies to issue dividends. They reward investors for holding onto the stock, and the regular income attracts new investors, which serves to drive up the company’s stock price over time.
Tax considerations
One major advantage of investing in Canadian dividend stocks is the dividend tax credit, which reduces the tax burden on eligible dividends compared to interest income. For example, a Canadian in the middle tax bracket could pay less than 10% tax on eligible dividends versus more than 20% on interest income. This makes dividend investing particularly attractive in taxable accounts.
Since dividend income is often taxed at a lower rate than employment income or interest income, it makes sense to hold dividend paying equities in non-registered accounts.
Dividend growth investing and the risks of chasing high yields
For long-term investors, dividend growth can be just as important as the size of the payout. Companies that consistently raise their dividends often demonstrate strong financial health and a commitment to returning value to shareholders. In Canada, these are known as Dividend Aristocrats — firms that have increased their dividends for at least five consecutive years. Examples include Fortis Inc., Canadian Utilities, and TC Energy. Dividend growth not only helps offset inflation but also provides investors with rising income over time.
On the other hand, investors should be cautious of stocks offering unusually high dividend yields, often 7% or more. A high yield can sometimes signal a “dividend trap” — where the company’s share price has fallen due to underlying financial challenges. If earnings decline, dividends may be cut, leaving investors with both reduced income and a weaker stock. A more reliable measure of sustainability is the payout ratio — the proportion of earnings paid out as dividends. Generally, a payout ratio below 70% is considered healthy, with 40–60% often seen as a sweet spot for balancing shareholder rewards and business reinvestment.
Choosing dividend-paying stocks
A company’s decision to pay dividends can reflect stability, steady cash flow, and financial maturity. Unlike growth-focused firms that reinvest profits into expansion, dividend-paying companies often operate in established industries such as banking, telecommunications, and utilities, where consistent earnings make regular payouts possible.
When evaluating dividend stocks, financial experts suggest looking beyond the headline yield. Key factors to consider include:
- Dividend history: Does the company have a track record of paying dividends consistently over time?
- Dividend growth: Has the payout increased steadily, or has the company cut dividends in difficult years?
- Dividend yield: Is the yield sustainable, or does it look too high compared to industry peers? In Canada, most stable dividend stocks yield between 3% and 6%.
- Payout ratio: What percentage of earnings is being paid out? A payout ratio around 50% is generally sustainable, while very high ratios may signal future risk.
For Canadians using dividends to supplement or replace fixed-income investments like bonds, focusing on quality companies with stable and growing payouts is often a safer long-term strategy.
Example: Stable dividend vs. high-yield trap
Imagine two Canadian investors:
Investor A buys shares of a stable bank stock paying a 4% dividend. The company has increased its payout every year for a decade. Over the next 10 years, that dividend grows gradually to 6%, while the share price also rises. Investor A enjoys both steady income and capital gains.
Investor B buys shares of a smaller energy company offering an 8% dividend yield. At first, the high payout looks attractive. But after two years, falling profits force the company to slash its dividend by half, and the share price drops 30%. Investor B ends up with less income and a lower-value investment.
This example shows why it’s often smarter to focus on dividend growth and sustainability rather than chasing the highest yield available. For most Canadians, steady compounding over time beats short-lived high payouts.
Dividend ETFs: A simple way to invest in reliable dividend paying equities
For Canadians who don’t want to research individual companies, dividend-focused ETFs (exchange-traded funds) can be a simple alternative. These funds hold baskets of dividend-paying stocks, providing instant diversification and reducing the risk of relying on just one company’s payout.
Two popular options include:
- iShares Canadian Dividend Aristocrats ETF (TSX: CDZ): Tracks companies that have increased dividends for at least five consecutive years, offering exposure to reliable “dividend growers.”
- Vanguard FTSE Canadian High Dividend Yield Index ETF (TSX: VDY): Focuses on large-cap Canadian companies with above-average dividend yields, such as banks, telecoms, and utilities.
Both ETFs allow investors to benefit from stable dividends and potential dividend growth, without needing to pick stocks individually. They can also be held in tax-advantaged accounts like a TFSA or RRSP, making them even more attractive for building long-term wealth.
Bottom line
Dividend investing can be a powerful way for Canadians to generate steady income, build long-term wealth, and protect purchasing power against inflation. Whether you choose individual stocks or dividend-focused ETFs, the key is to look for sustainability and growth — not just the highest yield. By focusing on companies with strong track records, reasonable payout ratios, and a history of increasing dividends, investors can create a more reliable income stream to support retirement goals or reinvest for future growth.
—with files from Em Norton and Romana King
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.