You've got questions. And we've got answers.
In a departure from Investor Clinic's usual format, in which we delve into a single scintillating investment topic, today we'll be answering some of your questions.
We'll be doing this from time to time, so keep those investing questions coming. Every month or so we'll feature a handful of them here. If we don't know the answer, we'll find someone who does.
Let's start with an easy one.
Are dividends received inside a registered retirement savings plan taxed as income for that year?
No they are not. Dividends, interest and capital gains from investments inside an RRSP are not taxable. When funds are withdrawn from an RRSP at a future date, however, the amount is added to your taxable income for that year.
Generally, experts recommend holding dividend stocks outside an RRSP to take advantage of the dividend tax credit, while keeping interest-paying securities – which receive no preferential tax treatment – inside an RRSP (or tax-free savings account.) However, because everyone's situation is different, you should consult a tax professional.
How can a company pay out more in dividends than it makes in profit?
Ideally, you want a company to pay out only a portion of its profit in the form of dividends. In other words, you want the “payout ratio” to be manageable. This reduces the chance of a dividend cut, which is one of the most unpleasant experiences an investor can have.
Occasionally, however, a company will pay out more than it makes. For example, RioCan REIT has been distributing more than 100 per cent of its funds from operations, and last year Sun Life Financial paid out more in dividends than it made in profit.
Clearly, companies can't sustain a payout ratio of more than 100 per cent forever, but in the short term they can find the money from various sources.
