Category Archives: Save Taxes

How U.S. Dividends Affect Canadians’ Dividend Income And Its Growth

I’m a Canadian who invests in U.S. dividend stocks. So, I thought it’d be useful to explore how U.S. dividends affect my income and income growth. Is it worth it to buy and hold U.S. dividend stocks when Canadian eligible dividends are more favourably taxed?

First, I’ll look into the effective dividend yield and effective dividend growth when receiving U.S. dollar-denominated dividends as a Canadian. Then, I’ll discuss how to reduce the income tax on U.S. dividends for Canadians. Lastly, I’ll discuss why it may be worthwhile to hold U.S. stocks even with increased uncertainty due to fluctuating foreign exchange rates.

The effective dividend yield

On the Toronto Stock Exchange, I hold stocks that pay U.S. dollar-denominated dividends. They include Brookfield Infrastructure Partners L.P. (TSX:BIP.UN)(NYSE:BIP), Brookfield Renewable Partners L.P. (TSX:BEP.UN)(NYSE:BEP), Brookfield Property Partners L.P. (TSX:BPY.UN)(NYSE:BPY) and Algonquin Power & Utilities Corp. (TSX:AQN)(NYSE:AQN), which yield roughly 4-6%.

This group of stocks has juicy yields partly because the U.S. dollar has been strong against the Canadian dollar.

I also get some nice yields of 4-8% from U.S. companies, such as Pfizer Inc. (NYSE:PFE), and Omega Healthcare Investors, Inc. (NYSE:OHI). However, the effective yield from these U.S. companies will be higher while the U.S. dollar remains strong against the Canadian dollar.

A Strong USD boosts current income

Essentially, a strong U.S. dollar (against the Canadian dollar) boosts my effective income today. However, if the U.S. dollar weakens (against the Canadian dollar), my effective yield from these companies would decline.

For the first group of stocks, depending on your brokerage, you may be able to call in and ask for the dividends to be paid in the U.S. dollar instead of having the brokerage automatically convert it toe Canadian dollars and possibly take a cut while at it. This only works for brokerages that allow holding of cash in U.S. dollars in the trading accounts.

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My Rental Income from 7 Canadian REITs

Many people like to receive rent from properties. On the other hand, I don’t want to manage properties or spend time keeping good relationships with tenants. Instead, I like to sit back and receive passive rental income from my Canadian REITs.

My Canadian REIT portfolio of 7 companies that make up roughly 12% of my dividend portfolio. Yet, they contribute close to 22% of my portfolio income.

I first go over my highest yielding Canadian REITs that offer income of 9% or higher. Then, I talk about the less risky REITs with yields of 4-6%.

By analyzing my Canadian REIT income portfolio, we can probably learn something. Here it goes!

REITs Provide Good Income

The first thing to note is that my Canadian REIT portfolio generates 22% of the income in my dividend portfolio even though it only makes up 12% of my portfolio value. That seems to indicate that distributions is a major part of REIT returns.

Well, it’s true that many REITs, including 4 of my REIT holdings yield 9% or higher right now.

Canadian REIT Portfolio Allocation

I analyzed my REIT portfolio in terms of their allocation according to market value, as well as income allocation. And I will talk about each Canadian REIT later on in the article as well.

My Canadian REIT allocation by value and by income

Source: Author

You’d notice that 28% of my Canadian REIT portfolio is Plaza Retail REIT (TSX:PLZ.UN), and it also contributes to 22% of my Canadian REIT income. I’m comfortable with the concentration in Plaza Retail REIT because of its track record and growth potential.

Northview Apartment also has a good track record of maintain distributions. However, its properties are mostly located in resource provinces. So, it is a good income play, but should only be bought when its yielding around 9% at historical highs.

The other Canadian REITs add diversification to the REIT income stream. Looking at the industry or asset class allocation, it looks pretty balanced with residential REITs making up almost one-third of the pie. That’s fine because everyone needs to live somewhere. If you’re not buying, you’re renting. Read More