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Canadian investors often seek favorably taxed income from domestic corporations, particularly those that distribute substantial dividends. TSX Blue Chip Stocks are especially attractive as they typically offer substantial dividends. Eligible Canadian dividends benefit from lower tax rates compared to employment income, making them an appealing option for income-seeking investors.
For example, according to TaxTips.ca, a British Columbian earning $100,000 from employment will be taxed at a combined federal and provincial marginal rate of 31% on the next dollar earned. In contrast, the same income earned as Canadian-eligible dividend income is taxed at a combined marginal rate of only 5.49% in a taxable account.
One such company offering substantial dividends is Manulife Financial (TSX: MFC). Last year, this large-cap stock distributed nearly $3 billion in dividends to its shareholders.
The Appeal of Manulife’s Dividend Income
The amount of dividend income a shareholder receives depends on the number of shares held. For instance, owning 100 Manulife common shares would result in $1.60 per share, equating to $160 in dividend income annually, based on the current quarterly dividend of $0.40 per share. Purchasing 100 shares at the recent price of $35.46 per share means an investment of $3,546, yielding a dividend return of 4.5%, assuming no commission fees—a scenario possible on commission-free platforms like Wealthsimple.
While the 4.5% yield is slightly lower than the risk-free one-year Guaranteed Investment Certificate (GIC) interest rate of approximately 5%, Manulife stock offers potential price appreciation, unlike GICs which only provide principal protection. This potential for capital gains makes the higher risk associated with the stock potentially rewarding in the long run.
Potential for Dividend Growth
Manulife's consistent upcoming dividend growth is noteworthy. The company has increased its dividend annually since 2014. With a robust business in life and health insurance, Manulife remains sustainably profitable, maintaining a healthy payout ratio. The 10-year dividend growth rate of approximately 10.9% is impressive, with the last dividend increase in February being 9.6%. The three- and five-year dividend growth rates stand at 9.3% and 9.9%, respectively. This growth is supported by the company’s adjusted earnings-per-share growth, which has risen by nearly 10% annually since 2014.
Last year, Manulife’s payout ratio was a sustainable 54% of net income and 42% of adjusted earnings. Even with a conservative estimate of maintaining this payout ratio and increasing earnings and dividends by about 7% per year, long-term returns of roughly 11.5% can be anticipated, assuming the stock is fairly valued today.
Current Valuation and Market Performance
After a significant rise of 38% over the past 12 months, investors should not expect a similar surge in the next year. Currently priced at $35.46 per share, Manulife trades at a blended price-to-earnings (P/E) ratio of about 10, indicating it is not overvalued. Future price appreciation is likely to align more closely with earnings growth, as much of the valuation expansion has already occurred.
The Stability and Safety of Manulife’s Dividend
Manulife’s dividend appears safe, supported by strong earnings and a sustainable payout ratio. The company’s diversified business model, including significant international operations, provides additional stability. Manulife's robust financial health and consistent performance reassure investors of the safety of its dividend.
Moreover, the company's commitment to returning capital to shareholders through dividends and share buybacks further underscores the attractiveness of holding Manulife stock for income investors. The anticipated continued growth in earnings and dividends enhances the appeal of Manulife as a reliable source of income.
Investors seeking income should consider the balance of yield, growth potential, and stability. Manulife offers an attractive dividend yield, potential for dividend growth, and a track record of financial stability. While the current yield is slightly below risk-free alternatives, the potential for capital gains and dividend increases makes it a compelling option for those willing to accept some level of market risk.
Manulife Financial (TSX:MFC) stands out as a compelling investment for those seeking stable, favourably taxed income. With a consistent track record of dividend growth, a sustainable payout ratio, and the potential for capital appreciation, Manulife offers a balanced approach to income investing. As always, investors should consider their risk tolerance and investment goals before making any investment decisions.
