You can see dividends in the Canadian market have grown about 7.9% a year over the past 20 years. Meanwhile, inflation has clocked in at an annual rate of 2.2%. Compounded over time, dividends grew by 361% while inflation caused price increases of 53%. The end result: investors receiving dividends saw a substantial increase in their purchasing power.
Keep in mind, the time period above not only includes the Global Financial Crisis (2008-2009) but also the COVID pandemic. These events weighed on dividend growth and propelled inflation higher.
The benefits of Canadian dividend stocks
When investing in dividend-paying companies, Canadian investors have tended to focus on those close to home. Why? Dividends issued by eligible Canadian corporations receive favourable tax treatment. Other benefits include strong valuations and dividend yields.
Valuations
When assessing the strength of the Canadian market, it’s natural to compare it to the market south of the border. But the U.S. market is almost 20 times the size of the Canadian market. How can we make a meaningful comparison?
One way is to look at a measure such as the price-to-earnings (P/E) ratio. This ratio compares a company’s current share price relative to its earnings per share. A lower P/E could mean that a stock's price is low relative to earnings potential -- and possibly a good opportunity for investors.
As we can see below, at the end of 2021 Canadian equities had a lower P/E ratio overall than their U.S. counterparts. This suggests a relatively attractive opportunity for investors in the Canadian market.
Comparing valuations of Canadian and U.S. Markets
P/E spread at historically wide levels