Evaluating the Attractiveness of National Bank of Canada's Preferred Shares: A Strategic Dividend Play

National Bank of Canada’s preferred shares have long been a cornerstone for income-focused investors, offering a blend of stability and tax efficiency that few other instruments can match. As of 2025, these shares continue to demonstrate robust dividend performance and favorable tax treatment, making them a compelling addition to a diversified portfolio.

Dividend Stability: A Pillar of Reliability

One of the most attractive features of National Bank of Canada’s preferred shares is their consistent dividend history. The bank’s first preferred shares, including Series 30, 38, 40, and 42, have established a predictable payment schedule, with dividends distributed on the fifteenth day of February, May, August, and November, respectively [1]. This regularity provides investors with a reliable income stream, which is particularly valuable in uncertain market conditions.

The bank’s commitment to maintaining stable payouts is further underscored by its recent announcements. In 2024, National Bank of Canada set the dividend rate for Series 30 at 6.191% for a five-year period starting May 16, 2024 [1]. This long-term assurance reduces the risk of unexpected cuts, a critical factor for investors seeking consistent returns. Moreover, the dividend yield for these preferred shares remains competitive at approximately 3.29%, with minimal fluctuations observed over the past decade [2]. Analysts also note that the dividend is well-covered by earnings, with a payout ratio of 44.5%, indicating ample capacity to sustain and potentially grow distributions [2].

Tax Efficiency: Enhancing After-Tax Returns

Beyond their stability, National Bank of Canada’s preferred shares offer significant tax advantages. In Canada, eligible dividends—such as those from preferred shares—are subject to enhanced tax credits, which reduce the investor’s tax burden. The federal dividend tax credit for eligible dividends is 15.0198% of the taxable amount [3], making these shares more tax-efficient than interest-bearing investments like bonds or GICs, which are taxed at full rates [4]. For U.S. investors, while a 15% withholding tax is typically applied by the Canadian Revenue Agency (CRA), this can often be claimed as a tax credit on U.S. returns, albeit with additional administrative complexity [4].

The CRA’s guidelines further enhance the appeal of these shares. For instance, the first $500,000 of dividends paid in a year is generally exempt from Part VI.1 tax liability [5], and corporate recipients face a 10% tax rate on preferred share dividends unless the payer elects to pay a 40% tax, which can be offset against its income tax liability [5]. These provisions make National Bank of Canada’s preferred shares particularly attractive for corporate investors seeking to optimize their tax strategies.

Strategic Considerations for Investors

While the dividend stability and tax efficiency of National Bank of Canada’s preferred shares are compelling, investors should also consider their risk tolerance and investment horizon. The bank’s strong capital position and consistent earnings provide a solid foundation for continued dividend payments, but market conditions and regulatory changes could impact future performance. Additionally, U.S. investors must navigate the complexities of cross-border tax implications, which may require professional advice to optimize returns.

In conclusion, National Bank of Canada’s preferred shares offer a strategic dividend play for investors prioritizing income stability and tax efficiency. With a proven track record of consistent payouts and favorable tax treatment, these shares represent a valuable component of a well-structured income portfolio.

Source:
[1] Common and First Preferred Shares, [https://www.nbc.ca/about-us/investors/capital-debt/shares.html]
[2] National Bank of Canada Dividends and Buybacks, [https://simplywall.st/stocks/ca/banks/tsx-na.pre/national-bank-of-canada-shares/dividend]
[3] Line 40425 - Federal dividend tax credit, [https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/tax-return/completing-a-tax-return/deductions-credits-expenses/line-40425-federal-dividend-tax-credit.html]
[4] Tax implications For U.S. Investors Owning Canadian Stocks, [https://www.suredividend.com/canadian-taxes-us-investors/]
[5] Corporation Instalment Guide 2025, [https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/t7b-corp/corporation-instalment-guide.html]