Welcome to the dividend stampede: the greatest payout in history

3 min read • July 14, 2023

According to a recent report by CIBC Capital Markets, Canadian companies paid $96.6 billion in regular and special dividends over the last year and $73.6 billion in stock buybacks to shareholders. The payout of over $170 billion set a record driven by the financial, energy and railroad companies. Current dividends for the S&P/TSX Index are 33% higher than at the end of 2019 (pre-covid).

In addition to higher dividends, U.S. and Canadian companies have been aggressively buying back stock to support their “depressed” stock prices. The U.S. and Canadian federal governments have noticed this and implemented new taxes on repurchases to generate additional government revenues.

In the summer of 2022, the U.S. government implemented a 1% share buyback tax. Meanwhile, in Canada, the federal budget announced a 2% buyback tax which goes into effect on January 1st, 2024. This new tax may prompt many Canadian companies to execute repurchases sooner than later.

There are two key advantages to receiving dividend income for Canadian investors:

1. Canadian Dividends are Tax Efficient

One-year guaranteed investment certificates (GICs) now offer over 5%. Given the high yields, many investors ask if they should invest money in these investments.

Dividends from eligible Canadian corporations receive preferred tax treatment and provide a higher after-tax return than interest income. For example, if you are an Alberta resident and are in the highest tax bracket, the difference in tax between $50,000 of dividends versus interest income is significant.

That’s a difference of $6,845, which is a 13.7% increase in income.

2. Dividends Help Returns

Although most stock market investors are focused on long-term capital appreciation, dividends continue to remain a key component driving overall total returns. As shown in the chart below, over 30 years, dividends make up, on average, 21% of the total return of the U.S. stock market and 31% of the Canadian stock market.’

U.S. and Canada Dividend Return as Percent of Total Return

Dividends make up a larger portion of total return in Canada since our Financials, such as the banks and life insurance companies, are a larger portion of the Canadian stock market.

Higher Dividend Yields at Matco

Both Matco Canadian equity funds have higher dividend yields than the broad stock market as measured by the S&P/TSX Index. As of June 30th, the Index had a dividend yield of 3.2%, whereas the Matco Canadian Equity Income Fund had a yield of 3.7%, and the Matco Small Cap Fund had a yield of 5.8%.

Over the last 12 months, 77% of our companies in the Matco Canadian Equity Fund increased their dividend by an average of 10.6%. Whereas, 43% of our portfolio companies in the Matco Small Cap Fund increased their dividend by an average of 29%. Although stock markets have been volatile this year, regular dividend income allows investors to get paid while waiting for capital appreciation from their equity investments.

The Bottom Line

Dividends provide a large portion of overall portfolio returns. Investors should not buy investments based on income yield. Instead, they need to take into consideration the after-tax return. For non-registered accounts, dividend income provides a significantly higher after-tax return.

Finally, Matco investors benefit from a higher dividend yield than the market index with a well-diversified portfolio of dividend-paying companies. 

Anil Tahiliani

Anil Tahiliani MBA, CFA

Senior Portfolio Manager

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