It’s important for investors to realize that there are differences between qualified and unqualified dividend distributions. This becomes apparent come tax time. Knowing the details will help you make better decisions when deciding how to properly allocate your investments… Some investments are more appropriate for tax-sheltered accounts.
Let’s explore the characteristics of these two types of dividend payments.
1) Dividends from Common Shares. Most regular dividend payments from Canadian corporations are qualified. This includes the monthly or quarterly dividends paid out by most Canadian corporations.
2) Dividends from Preferred Shares. Most preferred shares dividends are qualified as well.
Qualified distributions are taxed at the normal dividend tax rates (the math is a little weird as you essentially get a tax credit).
Related: Common Stock or Preferred Shares
This type of distribution is taxed at your normal income tax rate. So in general, the taxes on
Continue reading Understanding Dividends vs Distribution
Many corporations either use bonds or preferred shares for raising money. Both types of investments are similar in certain aspects however there are a few key differences that set them apart. The type of security they represent is one of the biggest. For example, if a shareholder invests in preferred shares, the stock will be considered as an equity instrument. This means that the shareholder will be entitled to a partial ownership of the company instead of a creditor. On the other hand, investing in a bond would mean that the shareholder is a creditor of the company.
As you can see, I have been sharing more information about the fixed income sector as I believe it is a necessary complement to dividend investing. Below are some related posts if you want to read further:
When talking about safe investments, bonds are typically referred to as the safest asset class. However, how safe are bonds? Bonds carry many of the same risks as stocks, so it is important to understand how they work. Here is what you need to know about the safety of bonds.
How Bonds Work
A bond is essentially an IOU or debt instrument issued by someone, usually a company or government entity. Think of it as the reverse of a loan – you are lending someone money, and they pay you interest for doing it. When you buy a bond, you are lending money to the company or government that issued the bond.
All bonds have the following features:
- Maturity: How long the bond is held until it is repaid
- Coupon: The interest rate paid on the bond
- Price: The face value of the bond
- Frequency: The frequency that you get paid interest (monthly, quarterly, annually)
- Callable: Whether the bond can be called and repaid early
Continue reading Are Bonds as Safe as they Seem?
As part of my RESP Planning, I have started looking into bonds. I will admit that my dividend investing accounts have no bonds at the moment. It’s not because I don’t believe in it, it’s because my company RRSP plan covers that through the mutual funds offered – I am indexing my defined contribution plan as it is the best option for that account.
I started looking at bonds ETFs and I was faced with quite a number of options to my surprise. I started looking into Vanguards ETFs first as they are highly recommend by Andrew Hallam. I also looked into iShare CHB as a friend has money in them and it has done well. Other than that, I will be going through the list of ETFs and comparing them to one another. I’ll need to figure out what kind of bonds I also want to invest in such as government bonds, corporate bonds or junk bonds. I am really just starting and
Continue reading Weekly Blog Round: Researching Bonds