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Hungry for dividends? Look no further than the TSX, CIBC says

TSX-listed firms now shell out more than $100 billion in dividends annually

TSX MERGER--12/10//07--Monitors inside the TSX broadcast centre located on the ground floor of The Exchange Tower on King Street West in Toronto's financial district, December 10, 2007. TSX Group Inc. agreed to buy Montreal Exchange Inc. for about C$1.31 billion ($1.3 billion) in cash and stock, combining Canada's equity and derivatives exchanges. (Andrew Wallace/Toronto Star)anw (Photo by Andrew Francis Wallace/Toronto Star via Getty Images)
TSX companies have hiked their dividends by 33% since 2019, outpacing their U.S. peers, a new note from CIBC Capital Markets says. (Andrew Wallace/Toronto Star)anw (Photo by Andrew Francis Wallace/Toronto Star via Getty Images) (Andrew Francis Wallace via Getty Images)

Yield-hungry investors don't have to look much further than Canada as dividend hikes from TSX-listed firms outpace their U.S. counterparts, CIBC Capital Markets says.

Canadian dividends are 33 per cent higher now compared to 2019 levels and offer yields that are twice as high as U.S. stocks, a record level of relative yield, says Ian de Verteuil, head of portfolio strategy at CIBC and lead author of the report, which was released on Sunday.

"Dividend yields have made up 30%-40% of overall Canadian equity returns over the past several decades. In an uncertain economic environment – with little confidence in the direction of interest rates – we continue to highlight the importance of dividend yield in overall investment returns," the report said.

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For comparison, dividends represent roughly one-fifth of equity returns south of the border.

The bulk of the dividends come from four sectors: Financials, pipelines, telecom and utilities. These sectors are well-known for their historically stable and high payouts, and account for about two-thirds of TSX dividends, according to CIBC.

Dividend increases are typically viewed by investors as a sign that management is confident about the future of the business, but examining metrics such as the payout ratio, which indicates how much of the company's net income is going towards these payouts, is also important.

Payout ratios can vary by industry but in general, investors tend to prefer lower ratios because it can suggest that the dividend is more sustainable.

Annual dividends top $100 billion

The report points out more than half of TSX-listed companies hiked their dividends last year, though that number is somewhat distorted by the pandemic when some firms suspended or cut their dividends and subsequently reinstated them or returned them to normal levels.

However, CIBC also notes the overall amount of dividends being paid out is much higher compared to pre-pandemic.

"At current levels, the S&P/TSX constituents are paying over $100 billion annually, compared to $76 billion before COVID," the report said.

Collective dividend hikes in both 2021 and 2022 totalled a whopping $9 billion, whereas annual increases of between $5 billion and $6 billion would be "impressive," it adds.

Dividend yields attractive despite higher rates

Rising interest rates can impact dividend-paying stocks because it raises yields for other investments such as fixed income and guaranteed investment certificates, therefore creating more competition for investor funds.

"Note that though interest rates have certainly risen from COVID lows, dividend yields are still very attractive vis-à-vis bond yields," de Verteuil said.

There's also the tax aspect. Dividends have preferential tax treatment compared to interest-bearing investments.

"Interest rates have certainly risen, but given the tax advantages for dividends, the after-tax yield on the S&P/TSX is still 50% better than a 10-year Canadian Government bond. In our opinion, this more than justifies the higher risk associated with dividends," he said.

Michelle Zadikian is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @m_zadikian.

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