Clark Wealth Management Group - ScotiaMcLeod Fredericton

Most investors recognize the valuable contribution dividends make to the total long-term return of equity investments. Along with often better long-term return comes some additional price stability because of the predictable stream of income available to investors. Typically investors are more comfortable to wait for prices to improve if they are receiving a dividend income as they wait. The much lower tax rate we pay on dividend income received from Canadian companies is also nice for those investing in a taxable portfolio.

Here’s why dividends are likely to be stable or grow. The last thing the management team of a large dividend paying company wants to ever do is reduce the dividend paid to investors. If that happens, the share price, and by extension senior management’s personal wealth and future career prospects often get crushed. Have a look at a 3 year price chart and the executive suites of Manulife Financial to see how rough it can be when dividend cuts are necessary.

Despite our arguably ever more narrow-minded view of the world of investments, Canada is not the only place to find stable dividend paying investments. There are high quality, stable, global businesses that pay their investors healthy dividends. As repugnant as it may seem to invest there, some of those businesses are even domiciled in the US. With the Canadian dollar essentially even with the US dollar, buying shares in these companies is relatively attractive now.

The preferred tax rates available on dividend income are not available for dividends paid by foreign (non-Canadian) companies. With a Tax Free Savings Account (TFSA) that problem is pretty much solved. A TFSA is an ideal place to receive foreign dividend income – tax free.

Unlike RRSPs, so far TFSAs are not formally recognized by the US Government so as is the case with taxable accounts, there is a treaty based 15% withholding tax on US dividends paid to Canadians. Even after you consider that withholding tax, when compared to taxable non-registered accounts, many Canadians will find it advantageous to earn their foreign dividends inside their TFSA.

While it’s far from a complete list of foreign dividend investment candidates, here are some very large multinational companies paying dividend rates higher than three percent you may want to check out: Johnson & Johnson at 3.5%; Kraft Foods at 3.7%, Pfizer at 4.3%, Philip Morris Int’l at 4.4%, Unilever NV at 4%, Westpac Banking Corp (Australia) at 5.6%, McDonald’s Corp at 3.2% and Deutsche Telecom (Germany) at 7.6%.

If you’re not comfortable investing in shares of individual companies, consider exchange traded funds (ETFs) as a diversified alternative. US based iShares Dow Jones International Select Dividend Index is currently yielding 3.8% while iShares Dow Jones Select Dividend Index is yielding 3.4%. There are also several good mutual funds available in this area but keep in mind that mutual funds do not flow dividends received directly through to unit holders so yield comparisons with stocks or ETFs don’t work well.

As always, speak with your own advisor to be sure the investments you’re considering are suitable for you based on your goals and tolerance for risk before acting on anything you read here.

Keir Clark, is a senior wealth advisor, with Clark Wealth Management Group and branch manager at ScotiaMcLeod in Fredericton, NB. He can be reached online at www.keirclark.ca or by telephone at 506-450-6465.

Information and opinions contained herein have been compiled from sources believed reliable but no representation or warranty, expressed or implied, is made as to the accuracy or completeness.