For hockey fans, the Stanley Cup Playoffs are a thrilling time, especially if their team goes far. Success hinges on countless strategic decisions made by coaches and players, from line-ups to in-game plays. Yet, in the end, only one thing truly matters
– who won.
A similar parallel can be drawn with investing, where there are almost an infinite number of decisions to be made. And like great teams, portfolios often combine a strong offensive and defensive structure. Every investment has two essential return components: income (your defense) and price appreciation (your offense). For stock investing, that typically means dividends and capital gains. These bring together the best of both worlds to create a winning combination, giving you a better chance of achieving your goals over time.
“Dividends provide the stable, more predictable portion of the portfolio, while the capital gains provide the horsepower.”
The power of two for one smart portfolio
Investors typically bundle dividends and capital gains into one total return number, so you may or may not be familiar with the weight that each can carry. Let’s take a look at the playbook to see where total returns come from.
If we look at $100 invested in Canada’s flagship index (the S&P/TSX Composite Index) over the past 25 years to the end of May 2025, we see something interesting (see figure 1). The navy line shows the capital appreciation in the index, while the blue line includes total return (capital appreciation plus dividends). The initial $100 investment grew to $283 based solely on capital appreciation, which translates into 4.2% per year annualized. A disappointing number, but the starting point matters here as the dotcom bubble was still in the process of bursting at the start of the chart.
When we add dividends to the capital appreciation, the number is much more impressive. That $100 now turns into $551 over the same period, bringing the return to 7.1% per year annualized. Dividends provide the stable, more predictable portion of the portfolio, while the capital gains provide the horsepower. The latter is more volatile over time, but also more powerful when paired with the former.
The Canadian advantage
If we look at today’s figures, the S&P/TSX Composite Index currently has a dividend yield of 3.1%. This is high relative to the S&P 500, which sits at only 1.6%. How do we explain this? It has to do with the types of companies in each market.
The U.S. has a high weight in technology. Although many of these companies pay dividends, the businesses are also growing fast, presenting lots of opportunity for management to invest in the business to grow outsized profits. Smart management teams should allocate capital to where they see the best returns for shareholders.
Canada, on the other hand, is heavy in stable industries such as financial companies and pipelines. They have growth avenues but not as many competing demands on their capital, like the rapidly growing tech space. Many of these companies have been strong performers over the years and have committed to growing their dividends and investing in the business. It’s another way to achieve the best of both worlds – long-term growth with a foundation of steady income.
Most of the world is more like Canada and less like the U.S., with a higher percentage of dividend growers and fewer large tech names. That said, when it comes to dividend investing, Canada has a huge tax advantage. When dividends are paid out by a Canadian corporation, they are typically paid out with after-tax dollars. To avoid double taxation, the government provides a dividend tax credit. Many countries also have withholding tax on dividends paid out to Canadians in nonretirement accounts, making Canadian dividends even more attractive.
When 1+1 = more than 2
With a great number of possible plays comes an even greater need for discernment. While capital gains and dividends are complementary players, keep in mind that each investor has different goals and yours should guide your strategy.
“Whether you’re aiming for steady income, long-term growth, or both, understanding how dividends and capital gains work together is key to building resilience and opportunity into your portfolio.”
If you need to regularly draw income from your portfolio (such as in retirement), a healthy dose of dividends for your equity exposure can be the right play. Such portfolios tend to be less volatile, and the income is more predictable. In the end, you will also get capital gains over time in addition to a growing stream of income as dividends rise. If you’re looking to grow your wealth and don’t need the income, capital gains may be the better option with heavier diversification in U.S. and International markets.
Whether you’re aiming for steady income, long-term growth, or both, understanding how dividends and capital gains work together is key to building resilience and opportunity into your portfolio. That’s where your advisor plays a critical role. Like a great coach, they don’t just pick the best players, they build the right line-up for your goals.
Scott Blair, CFA
Head Portfolio Manager
