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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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