Where Canadians put their money depends on when they expect to need the money and what their financial goals are.
When Canadians should put money in dividend stocks
Canadians can put their money in stocks if they don’t need the money for a long time, such as for at least the next three to five years. Stocks are higher-risk investments than interest-bearing investments like Guaranteed Investment Certificates (GICs). So, Canadians should expect (and target) their stock investments to make them more money in the long run.
Putting your money in solid dividend stocks can add a layer of safety to your investments because they provide periodic returns via dividend income. Receiving dividend income can add reassurance for shareholders and help them hold for longer-term returns.
Canadian bank stock example
For example, one of the Big Five Canadian bank stocks, Canadian Imperial Bank of Commerce (TSX:CM), is an old dividend payer; it began paying dividends more than 150 years ago. According to the Canadian Dividend All-Star List, the bank has not cut dividends in at least the past 50 years. So, CIBC is a strong dividend payer.
The bank stock peaked in 2022 and due to a more negative economic outlook from higher interest rates and relatively high inflation, the stock is still more than 20% off from that high. At $58.60 per share, it trades at a reasonable price-to-earnings ratio of about 8.7. In the last year, its payout ratio was sustainable at 48% of net income available to common shareholders.
The bank also raised its dividend by 3.4% last month, which should be a boost of confidence for investors. Notably, in recent years that are normal, CIBC has tended to increase its dividend twice a year. At the recent quotation, it offers a respectable dividend yield of 6.1%.
In the last 10 years, the bank increased its adjusted earnings per share (EPS) by about 4.3% per year. Assuming a 4% EPS growth rate going forward, we can approximate long-term total returns of roughly 10% annually.
$10,000 invested in CIBC stock today would make annual dividend income of about $614 based on its current payout. It also has the potential to increase its dividend over time. If the stock goes down, you would be sitting on losses. If the stock goes up, you would be sitting on price gains. However, you won’t realize any gains or losses until you sell.
When should Canadians put money in GICs?
In today’s higher interest rate environment, you can earn decent interest income from interest-bearing investments like GICs. The best GIC rate currently provides interest income, yielding about 5.75%. It makes sense to lock your money in GICs if you know you’ll need your money back in X number of years, as GICs will also protect your principal. For example, you may be saving for a vacation or car purchase that you plan to make within the next few years.
Or you may be saving for a down payment for a property. However, this could take many years, and, theoretically, you could put this amount in stocks. But if you want your down payment to be 100% secure, you should put it in safe investments like GICs.
$10,000 placed in a one-year GIC yielding 5.75% would make interest income of $575 in a year. If you put the resulting amount in a GIC again (after one year), you would get whatever interest rate is available at that time.
Depending on your risk tolerance, investment horizon, and investment experience, you might consider placing a certain percentage of your down payment money in solid dividend stocks. The closer you are to your planned year of buying your property, the lower the risk your investments should be.
