Replace A Loser With A Dividend Growth Blue Chip

I made the mistake of buying Teck Resources (TSE:TCK.B) as one of my first investing experience. The mistake is 2 folds. First, Teck Resources has volatile earnings, as the company’s earning’s power is determined by economic demands and the price of the basic materials. Second, I did not know about valuations at the time. Understanding valuations is one of the fundamental ideas of value investing. In my opinion, value investing combined with dividend growth investing leads to success. Holding a company which pays a growing dividends also helps with controlling emotions.

I managed to sell out on my Teck position on one of its “up” days. Still, I posted a 30% loss. To add to the pain, the transactions occurred in my Tax-Free Savings Account. So, I’m unable to report a capital loss to offset some of my taxes. I remember I bought Teck in the TFSA because I intended for it to be a capital gains play. Obviously, that didn’t happen. Do all your initial investing experiments in the taxable account (so you could report a capital loss if the worst happens). After you’ve done “enough” learning, then, invest properly in your TFSA and RRSP.

On the same day that I sold my Teck position, I used some of the capital to buy International Business Machines (IBM), and the rest to buy Union Pacific (UNP). Yes, I bought US positions in my Canadian currency TFSA. Generally, there’s a 15% withholding tax on US companies. Because these companies have low yields, the 15% deduction is not that painful. However, if I bought them in my taxable account, I would be paying my marginal tax rate on those dividends, which is higher than the 15%. Of course, I could have bought these shares in my RRSP so that I don’t get the tax withholding. (There’s a tax treaty between the United States and Canada.) Thinking deeper though, it makes more sense to hold higher yielding US companies in my RRSP. Generally, I try to buy high quality companies with yields closer to 3% (or higher) in there.

To read further about my decision of selling Teck Resources and buying some shares in IBM and UNP, please visit my Seeking Alpha article.

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Disclosure: I am long IBM and UNP at the time of writing.

Disclaimer: I am not a certified financial advisor. This article is for educational purposes, so consult a financial advisor and or tax professional if necessary before making any investment decisions.

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2 thoughts on “Replace A Loser With A Dividend Growth Blue Chip

  1. Barry

    On that 15% withholding tax Revenue Canada gives a foreign tax credit for your non registered account which makes it pretty much a wash – at least in my case in the sense of double taxation. On the other hand what about putting dividend growing US$ ADR’s domiciled – there are two ADR listings for Royal Dutch Shell by example with different tax consequences for the “A” shares – in the UK such as GlaxoSmithKlein or National Grid in your TFSA? There are no withholding taxes.

    1. Passive Income Earner Post author

      Hi Barry,

      US dividends count as foreign income no matter what. So, even with the foreign tax credit, one must still pay the marginal income tax rate. So if one’s marginal income tax rate is greater than 15%, then, it’s still better to buy the US stock in the RRSP.

      Thanks for bringing up the topic about the ADRs. How I understand it is that if it’s a UK company and listed on the US stock exchange as an ADR, then there’s no withholding tax. So those would fit perfectly in the RRSP or TFSA. If they’re bought in the non-registered account, again, the dividends are taxed at the marginal income tax rate because it’s foreign income.

      Passive Income Earner

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