Equities Key Benefits

Equities can be a valuable part of your portfolio. They help to build your savings, protect
your wealth from inflation and maximize investment income.

Building your savings

Historically, equities have provided superior long-term returns compared to cash and
fixed income investments. However, equities do typically fluctuate more in value.
Because these fluctuations tend to smooth out over time, a long-term perspective is
important when investing in equities.

Protecting your wealth

Taxes and inflation can erode your wealth over time. Historically, when compared to
fixed income investments, equities have delivered a higher long-term rate of return and
more favourable tax treatment – which may help to slow or prevent the erosion of your
wealth.

Common share ownership in Canadian public

companies offers many potential benefits.
Maximizing your investment income
Certain equities pay owners dividends or distributions which can enhance investment
income. The income generated by Canadian equity investments – such as dividends
or capital gains – is taxed more favourably than interest income from bonds or GICs.

Beyond the general benefits of equities, there are some other benefits associated with
specific equity types.

 Common Shares
 Preferred Shares
 Dividend-Paying Equities
Common Shares
Common share ownership in Canadian public companies offers many potential benefits
to investors:

 Capital appreciation: The market price of a stock will go up or down over time.
When it goes up, shareholders may choose to sell their shares at a profit.
 Dividends: Many companies pay dividends to their shareholders, which can
provide a source of income for investors.
 Voting privileges: The ability to vote gives shareholders the opportunity to have
some control over company leadership and key decisions.
 Liquidity: Shares are generally more easily bought or sold than other kinds of
assets like real estate, art or jewellery. This means investors can liquidate or add
to their positions with relative ease.
 Dividend tax credit and capital gains tax: Dividend income and capital gains are
taxed more favourably than employment income and interest income.

Preferred Shares
Preferred shares are a type of equity that has a higher claim on the assets and earnings
of a company than its common shares. Preferred shares can be a good source of
investment income. In many ways, they have more in common with fixed income
products than with common shares. Like bonds, preferred shares are often rated by
agencies such as Moody’s and Standard & Poor's, so investors can get a professional
third-party opinion.

The yield that a preferred share offers on issue is driven by the relevant risk-free
benchmark rate plus a spread (or premium). For example, the rate may be determined
by adding a few percentage points over the current bank of Canada three-month T-Bill
rate. The term “risk-free” is used because a T-Bill is a nearly risk-free investment since it
is issued by the Government of Canada and payment of principal is almost guaranteed.
The spread is tied to the quality of the issuing company. Companies perceived to have
a higher degree of risk will offer a bigger spread, while companies with lower perceived
risk can often find buyers even when they promise a smaller spread.
Compared to common share dividends, preferred share dividends are consistent.
Dividends are paid to preferred shareholders before common shareholders. Most
Canadian preferred shares are cumulative. When dividends are withheld, they
accumulate in what is known as arrears. All arrears of cumulative preferred dividends
must be paid before any common dividends can be distributed. Because of these
features, preferred share dividends are generally more likely to be paid than common
share dividends.

The price of preferred shares can change over time. Like bond prices, preferred share
prices will increase when interest rates fall and decrease when interest rates rise. The
price of a preferred share will also be affected by the market’s perception of whether the
issuing company can meet its dividend commitments. This price movement provides an
opportunity for capital appreciation. In many cases preferred shares are redeemable
which means that capital appreciation is limited. With such a feature, the company has
the right to buy the preferred shares back at a pre-determined price and points in time.

Dividend-paying Equities
Many companies – but not all – periodically distribute their earnings to shareholders in
the form of cash dividends. Dividend-paying stocks offer numerous advantages,
including:

 Attractive returns: Dividends paid are part of the total return on your
investment.
 Less volatility: Dividends help lessen the potential fall of a company’s stock
price, thereby reducing volatility.
 Increased income: Dividends provide income (although they are only a small
part of an investment’s total return).
 Stability: Companies that manage their cash flow effectively tend to sustain and
grow their dividend payouts over time. Successful growth of earnings usually
pays off for investors in the form of higher share prices.
 Favourable tax treatment: Canadian dividends receive more favourable tax
treatment than interest income, which is fully taxed like employment income.
Example: This table shows how the after-tax yield of a dividend is higher than the after-
tax yield of interest from a fixed income product because of tax credits. This is
calculated using the highest marginal tax bracket for an Ontario resident in 2015.

Interest Canadian Dividends Capital Gains

Gross Capital Gain $1,000.00
Included in Income $1,000.00 $1,000.00 $500.00
Gross up (at 38%) $380.00
Total Included in Income $1,000.00 $1.380.00 $500.00
Federal Taxes $363.70 $501.91 $181.85
Less Federal Dividend Tax Credit ($207.28)
Provincial Tax
$131.60 $43.61 $65.80
(after provincial dividend tax credit)
Total Tax $495.30 $338.24 $247.65
After Tax Amount $504.70 $661.76 $752.35
Marginal Tax Rate 49.53% 33.82% 24.76%

The information provided in this article is for general purposes only and does not
constitute personal financial advice. Please consult with your own professional advisor
to discuss your specific financial and tax needs.