INVESTING

The secret to sustainable, smart passive income

Imagine this: the year is 2045, and you're sitting in the living room of the home you bought in 2040, looking around, because at last, you got around to painting.

The colour was one you didn't know even existed for most of your life. But then back in 2035, you met a friend for lunch at this little diner that had the bluest booths you'd ever seen and, well, it just stuck.

You hadn't seen that friend in a decade, and you laughed together, because 2025 couldn't really have been that long ago, could it?

And you smile to yourself, aware again of your living room and its bluest walls, missing that laugh but grateful for that year, because 2025 was also the year you discovered dividend investing.

Which means: right now, in 2025, you can set yourself on the path to that imagined life. One of the easiest ways to get there is dividend investing—and this guide will show you how.

What is a dividend? Think of it as a thank-you note (with cash inside)

When you buy a stock, you become a part-owner of that company. When that company succeeds and makes a profit, it has a choice: it can reinvest all the money back into the business, or it can share some of that success directly with its owners.

That share of the profits, paid out to you, is a dividend.

Investing in dividend stocks (or ETFs) creates a steady, quiet stream of income that flows into your account while you go about your day.

The data behind dividends

The data is as compelling as imagining who you'll be in 2045 after years of collecting passive money. Data shows that a significant portion of the stock market's long-term gains haven't come from the dramatic spikes you see on the news, but from the patient reinvestment of dividends.

According to RBC Global Asset Management, from 1986 to 2023, Canadian stocks that consistently grew their dividends outperformed the broader TSX Composite Index, and they did so with less volatility. Dividends aren't about chasing trends—they're about building quiet wealth.

Dividends as a Canadian

In Canada, some of the most reliable dividend payers are the established companies you see every day—banks, utility providers, and telecommunication companies that have a long history of steady profits.

What are the different kinds of dividends?

Understanding this is key to knowing how you'll actually get compensated for owning a stock. You'll often see cash dividends as what a company provides, but it's not the only one.

• Cash dividends: This is the most common type by far. It's a direct payment made to you, the investor, which lands in your account as cash. It's simple, predictable, and what most of this article refers to.
• Stock dividends: Instead of cash, a company might issue a stock dividend, giving you additional shares. If you owned 100 shares and the company issued a 5% stock dividend, you would receive five new shares.
• Special dividends: This is a one-time bonus payment that is separate from the company's regular dividend schedule. It often happens after an exceptionally profitable period or a large business sale.

What is a dividend yield?

You'll see the term "dividend yield" everywhere, and it's one of the most important numbers to understand. It's a simple calculation that tells you how much a company pays in dividends each year relative to its stock price.

The formula for dividend yield is: Annual Dividend Per Share / Price Per Share = Dividend Yield

Think of it as the return on investment you get from dividends alone. If a company's stock costs $100 per share and it pays $4 per year in dividends, its dividend yield is 4% ($4 / $100).

While a higher yield might seem better, it's not the whole story. A very high yield can sometimes be a warning sign that the stock price has fallen because the market believes the dividend might be unsustainable. Often, the sweet spot is a healthy, moderate yield from a stable company with a long history of making its payments.

How does a dividend stock actually make you money

A strong dividend stock works for you in two ways at once:

1. The regular payment: This is the dividend itself—a predictable cash payment that lands in your investment account, usually every few months. It's real money you can use or reinvest.
2. The growth potential: At the same time, the value of your shares can go up over time. This is called capital appreciation.

These two features collaborate to create a meaningful impact on your portfolio's growth. Even in years when the market is flat or down, the cash from dividends can provide a positive return, making your portfolio more resilient.

How to find dividend investments in Canada

There are two key considerations: first, you have to find companies willing to pay dividends, and then you have to make sure these companies are actually able to pay you for investing.

A high-flying tech startup, for example, is probably going to put every dollar it earns back into growth and development. Which may be good for the company long-term, but won't net you passive income (yet).

An established energy company, though, with stable infrastructure and an established foothold in the market is more likely to reward shareholders. Here's how you can find them.

Choice 1: Easy ETFs

For most beginners, the easiest and safest way to start is with a Dividend ETF (Exchange-Traded Fund). An ETF is a single investment that contains many different dividend-paying stocks, giving you instant diversification.

Finding dividend ETFs in your Questrade account

1. In the stock search bar, you'd search for terms like "Canadian Dividend" to get started
2. From that list, you'd research more into which ETFs focus on established companies as opposed to, say, emerging markets
3. When you select an ETF and look at its info, you'll see a figure called its MER (Management Expense Ratio). This is the small fee you pay for the fund to be managed. The lower the MER, the more of your returns you keep.

Remember: Trading ETFs (and stocks) at Questrade is commission free, which means when you find a low-MER possibility, you'll be saving even more than if you bought it at a bank with commission fees.

Choice 2: Hands-on stocks

Stocks don't offer the same instant diversification potential as ETFs, but you do get total control over the companies you're invested in, and what sectors you're focusing on.

The stock screeners available to you just by being a Questrade customer make this easy. You can filter the entire market and all its thousands of possibilities down to a focused, manageable list based on key metrics like:

• Dividend yield
  The dividend yield is the annual dividend paid per share, divided by the stock's current price. A 4% yield means the company pays you $4 in dividends each year for every $100 your shares are worth. Be cautious of extremely high yields (e.g., over 8-9%), as this can sometimes be a red flag that the market thinks the dividend is at risk of being cut.
• Payout ratio
  This tells you what percentage of the company's profits are being paid out as dividends. A ratio below 75% is often a healthy sign, suggesting the company has plenty of cash left over to reinvest in the business and weather downturns.
• A History of Growth
  Does the company have a long track record of paying—and even better, increasing—its dividend year after year? This demonstrates a commitment to its shareholders, and gives you peace of mind that your choice of dividend stock will keep paying you returns long-term.

Turn passive income into effortless income

Having a stock that pays you just for owning it is enticing by itself. But you can take it even further.

A Dividend Reinvestment Plan (DRIP) makes it so that anytime your stocks or ETFs pay you a dividend, it is automatically used to buy more shares of the same investment.

Instead of getting a few dollars in cash, you get a few more full (or fractional) shares. Those new shares then earn their own dividends, which then buy even more shares, and, before you quite realize it's happening, you're sitting in your living room admiring the life you've built.

Consider the difference: A $10,000 investment with a 4% dividend yield pays you $400 in the first year. If you take the cash, you'll still have your $10,000 investment. But if you DRIP it, you'll start the next year with $10,400 invested, all working to generate even more income for you.

A quick word on taxes (and how to be smart about them)

One of the best parts about dividend investing in Canada is that you can do it in a way that minimizes your tax bill. By holding your dividend stocks inside a registered account, you can shelter the income you receive.

Here's how the most common accounts work for you:

• In a Tax-Free Savings Account (TFSA): This is often the top choice for dividend investors. All your Canadian stock or ETF dividend income and any capital gains from selling your shares for a profit are completely tax-free.
• In a Registered Retirement Savings Plan (RRSP): Your investments grow tax-deferred. You won't pay any tax on the dividends you earn year after year, only when you withdraw the money in retirement.
• In a First Home Savings Account (FHSA): Combining the best features of an RRSP and a TFSA, the FHSA allows your dividend investments to grow completely tax-free, as long as the funds are eventually used for a qualifying first home purchase.
• In a Registered Education Savings Plan (RESP): This is a powerful tool for saving for a child's education. The dividends your investments earn are not taxed as long as they stay in the plan, helping the funds grow and compound more quickly over time.