It was once that investors take their bonds into RRSPs to capitalize on the zero tax rate provided by these makes up about income-producing and other securities, keeping their equities outside of registered accounts to take advantage of Canada’s Dividend Tax Credit.
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These days, however, dividend paying stocks offer much higher yields than most bonds do. The TFSA has additionally changed the way in which investors think about assembling their broader portfolios, as investments you will find never after tax.
What it all boils down to is personal choice. Based on your short- and long-term goals, income and retirement needs and tax situation, a stock may be most appropriate for the cash account, TFSA or perhaps your RRSP or RRIF.
It’s also important to notice that since U.S. regulators consider RRSPs and RRIFs to become pension funds, U.S. stocks in those accounts aren’t susceptible to withholding taxes. In other words, investors get the full dividend payments.
That said, investors have a tendency to trade less within their RRSPs, searching for steady equity investments that offer long-term stability and growth – whether they pay a dividend.
“Each one of these conventions are meant to be broken once the right opportunity comes along,” said Norman Levine, md at Toronto-based Portfolio Management Corp. “What you want in your RRSP are stuff that are likely to increase your profits – an overall total return – that’s capital appreciation, interest and dividends.”
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General Electric Co.’s (GE/NYSE) mixed performance over the past decade hasn’t made it a perfect buy-and-hold name. But it’s transforming itself from a financial services company, back into the industrial conglomerate it was previously. As a result, Levine likes its prospects moving forward.
“The earnings are more predictable, there isn’t exactly the same kind of federal regulation financial service companies face and it doesn’t eat up just as much capital, therefore the market awards it a greater multiple,” he explained.
The strong U.S. dollar makes it difficult for GE to earn money overseas, but that headwind will ultimately subside.
Meanwhile, it’s produced a dividend rate of growth of 14 percent in the last five years, and Levine expects another hike next quarter.
“I’m more interested in companies that regularly increase their dividends, rather than individuals with high yields that aren’t growing,” he said.
Another of Levine’s holdings, industrial pump and systems manufacturer Gorman-Rupp Co. (GRC/NYSE), certainty fits the bill, having raising its dividend for 42 consecutive years.
“The income just keeps going up along with the stock,” he said. “It always sells in a high valuation, but has become more reasonable, that is what attracted our attention.”
Power Financial Corp. (PWF/TSX), the financial services company that owns a majority stake in Great-West Lifeco Inc. as well as controls asset managers like Investors Group and Boston-based Putnam Investments, also offers past raising its dividend.
I’m interested in companies that regularly increase their dividends, rather than those with high yields that aren’t growing.
This stopped during the economic crisis, but the company resumed dividend hikes this season.
“We think it’ll carry on doing that,” Levine said. “It will take advantage of rising rates of interest in the U.S., Europe’s economy starting to pick up, and we think the worst is behind fund companies.”
Stephen Takacsy, chief investment officer at Montreal-based Lester Asset Management, also searches for long-term dividend growers for his clients’ RRSPs.
Renewable energy producer Boralex Inc. (BLX/TSX) already provides a dividend yield of about four per cent, but Takacsy thinks there is lots of space for dividend growth.
“The weather change issue will put more emphasis on renewables, so companies with expertise for example Boralex will be the primary beneficiaries,” he explained.
The company’s primary focus is wind projects in Quebec and France, while it also has exposure to solar and hydro.
What’s most engaging to Takacsy may be the large number of projects Boralex has within the pipeline, that ought to result in its EBITDA doubling between 2014 and 2017.
Innergex Renewable Energy Inc. (INE/TSX) is a lot more focused on hydro projects, with almost all of its operations in Canada. However, Takacsy observe that it is looking to expand elsewhere, including in Mexico, included in the broader trend of Canadian players exporting their knowledge abroad.
“Both Boralex and Innergex are buy and set away type names, with dividends which should grow,” he said.
The telecom sector has long been an area investors flocked to for stability and growth, and its where Takacsy highlighted Telus Corp. (T/TSX).
“It’s benefiting from the insatiable appetite for data and video, but they are also probably the most shareholder-friendly company,” he explained. “They run a really tight ship, with low churn rates, and industry-leading ARPU and margins.”
Telus consistently raises its dividend, buys back shares, and Takacsy thinks chief executive Darren Entwistle is doing all the right things.
“It’s been an excellent wealth creator and should continue doing so,” he explained.
While many investors are shying from anything energy-related these days, Takacsy thinks this has created a chance in Pembina Pipeline Corp. (PPL/TSX).
“It’s a steal at this price and has a very safe dividend,” he explained. “Their EBITDA is going to skyrocket within the years to come because they have a lot of contracted projects for example pipeline expansions and gas plants.”
Even with no recovery in oil prices, this secured growth should lead to healthy dividend increases in the next 5 years.
“It’s another great name to buy and set away in an RRSP,” Takacsy said.
Illustration by Chloe Cushman, National Post