Dividends are after-tax profits that an organization distributes to its shareholders, typically quarterly, and might be paid out in money or in some type of reinvestment.
Heath said that an organization that pays a high dividend is reinvesting a smaller portion of its profits in growth, potentially missing out on opportunities to extend its market value. In Canada, high-dividend stocks come from a small portion of the stock market – banks, telecommunications corporations and utilities.
“Ideally, an investor should consider a combination of high- and low-dividend stocks to create a well-diversified portfolio,” he said.
Contribute to the RRSP and save on taxes
“There are a lot of taxpayers, investment advisors and accountants who really promote the concept of putting as much as you can into your (registered retirement plan),” Heath said.
As a financial planner, he has the other opinion. According to Heath, using RRSP contributions to get the largest tax refund possible is not necessarily the perfect approach for people in low tax brackets and should hurt them in the long term in the event that they withdraw those savings in retirement in the next tax bracket.
“Sometimes it’s OK to pay a little tax as long as you pay at a low tax rate,” he said.
Instead, tax-free savings account (TFSA) contributions is perhaps higher for somebody with a low income.
It may make sense to make the most of the low tax bracket by making RRSP withdrawals early in retirement, even though it may feel good to only withdraw out of your TFSA or non-registered savings and keep your taxable income low.
