Quiz: Do You Really Know Dividends?

Q: What exactly is the payout ratio?

It's the percentage of a company's net earnings paid out as dividends to shareholders, rather than reinvested in the business. A very high ratio (close to 100% or above) can signal a dividend that's hard to sustain.

Q: Is a high dividend yield always good news?

Not necessarily. An unusually high dividend yield can also signal that the stock price has dropped sharply (the market anticipating a dividend cut), rather than a bargain.

Q: Is the TFSA a bad choice for US dividend stocks?

Not necessarily a bad choice overall, but because of the non-recoverable 15% withholding, many investors prefer holding US dividend stocks in an RRSP rather than a TFSA when possible.

Question 1

What's the difference between an "eligible" and "non-eligible" dividend?

Accepted Answer

The gross-up rate and tax credit differ by type

Answer

No real difference, just the name

Answer

Eligible is for ETFs only, non-eligible for stocks

Answer

Non-eligible dividends are never taxable

Question 2

Why does the gross-up and tax credit mechanism exist for dividends?

Accepted Answer

To offset the corporate tax already paid on that profit before distribution

Answer

To discourage people from holding stocks

Answer

It's a historical error never fixed

Answer

To favor US dividends

Question 3

Generally, how are Canadian eligible dividends treated compared to equivalent interest income, in a non-registered account?

Accepted Answer

Dividends are generally taxed less heavily than interest

Answer

Dividends are taxed more heavily than interest

Answer

The treatment is always identical

Answer

Interest is never taxable

Question 4

If you hold a US stock paying a dividend inside your TFSA, what happens with the 15% US withholding tax?

Accepted Answer

It applies and is generally not recoverable inside a TFSA

Answer

It never applies inside a TFSA

Answer

It's automatically refunded by the CRA

Answer

It only applies to Canadian stocks

Question 5

And inside an RRSP, what happens to that same 15% US dividend withholding?

Accepted Answer

It's generally exempted thanks to the Canada-US tax treaty

Answer

It applies the same way as in a TFSA

Answer

It doubles to 30%

Answer

It only applies to US ETFs

Question 6

What is a DRIP?

Accepted Answer

A program that automatically reinvests dividends into new shares/units

Answer

A type of leveraged ETF

Answer

A tax penalty on unclaimed dividends

Answer

A provincial tax credit

Question 7

Is a dividend "free" money added on top of your total return?

Accepted Answer

No, the stock price generally drops by the dividend amount on the ex-dividend date

Answer

Yes, it's a full bonus on top of the stock's value

Answer

Yes, but only for ETFs

Answer

No, dividends always reduce your net worth

Quiz: Do You Really Know Dividends?

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