Index investing is often one of the most popular investment strategies, but another one that is really common is dividend growth investing. This is a strategy that is fairly easy, and it involves investing money into companies that have strong dividends with a good history of increasing these dividends. Investors find that they have a steady income with this form of investing, and they also get to take advantages of tax benefits.
How it Works
Entrepreneurs that own companies that have a lot of excess cash flow want to focus on ways that they can handle the money in a tax efficient way. Does it make more sense to just leave the money in the corporations and invest it that way?
Investing in the equities of a corporation is not the most tax efficient way to invest, but most accountants will agree that the dividend income received by corporations can move on to the shareholders of the corporation and can still get the dividend tax credit. Also, the corporation is entitled to a refund on the tax that they pay on the dividend. Once it goes to the shareholders, the corporation is not held accountable for the taxes on these dividends.
Benefits of Dividend Investing
The biggest benefit is the fact that the corporation is not required to pay much income tax on the money that they receive. This will depend on the particular province, but it is usually around 15% or less. That means that the corporation is able to have a higher capital after the taxes are taken out to work with. That makes it a much better option than just withdrawing the money from the corporation.
Another big advantage of using the corporation to invest money is dividend sprinkling, that is if the corporation is set up for that. This basically allows the company to control the dividends and they can pass it on to the shareholders that would pay the lowest amount of income tax.
While this does seem like a good idea, there is a downside to it. Dividends can sometimes affect the eligibility of old age security benefits. If the dividends are big enough, they can trigger certain clawbacks, like the old age security clawback. This strategy is best used by those that plan on maintaining their capital. If capital is increased, then there can be certain tax implications to face.
Is it For You?
This is not a strategy that should be used by everyone, but for those that are part of a corporation that has a lot of excess cash flow it may be a great idea. If it is something that you are interested in, you might want to consider discussing it with an accountant.