Reader Question

Today I thought I’d answer some questions I received recently from a reader. The reader is in the process of learning about dividend investing and had asked the following questions:

Question: “How worthwhile is it to invest in US dividend-paying stocks seeing that, as Canadians, we do not benefit from the dividend tax credit available to Canadian stocks”

My Answer: Although we don’t receive a tax credit for dividends received from US companies I believe that for diversification purposes it’s necessary to own some American dividend paying companies. There really are no Canadian alternatives to companies such as JNJ. The same is true for large cap diversified industrials (ie- MMM) pharma (ie- PFE) and tech stocks (ie- MSFT). If there were world class Canadian alternatives of similar quality I would definitely own them. However, I don’t think good quality foreign companies should be excluded from a portfolio based on the fact that they don’t qualify for the dividend tax credit (even from a dividend growth portfolio).

Question: Doesn't Derek Foster, author of Stop Working, recommend sticking to Canadian dividend stocks when possible?

My Answer: I can’t speak for Derek… only he can answer this one with 100% accuracy. However, I’m assuming Derek like most Canadian dividend investors would recommend sticking to Canadian dividends WHEN POSSIBLE. In my opinion it is not possible to build a properly diversified portfolio with only Canadian stocks, as I mentioned above there are a few sectors with no Canadian companies that meet my investment strategy and criteria. I’ve read Derek’s book and if I recall correctly he owns a number of US securities - BUD, JNJ, PFE and WMT.

Hope this helps and thanks for reading.

JNJ

I purchased JNJ yesterday for a long term hold and here are my reasons why:

- 44 years of consistent dividend growth.
- Dividends issued to shareowners every quarter since 1944.
- Dividend raised each year for 44 consecutive years.
- Sales have increased each year for 73 consecutive years.
- Double digit Earnings increases for 21 consecutive years.
- Current yield of 2.50%
- 44% of sales outside of North America (built-in currency hedge)
- ROE levels of above 21% for the past 10 years
- Current P/E – 16.18
- Projected 2007 P/E – 15.3
- Projected 2008 P/E – 13.44
- 4 Star rating from S&P - $74 one year target
- Argus rates it a buy with a $76 one year target
- I like their diversified holdings within the healthcare sector particularly their consumer products.

(Disclaimer: I’m not your boss or your spouse so do you own research and make your opinions on when to buy or sell. Nothing I say should be bastardized or construed in any way to be advice)

Dealing with a Spouse and Money

Ok it’s a common problem...a spender and saver who share a bank account. The saver/spender relationship can often be difficult as the saver is always nagging the spender, and the spender is always accusing the saver of being “cheap”. Does any of this sound familiar? (I might be wrong, but I’m guessing that if you’re reading this you're probably the saver...)I’ve heard of many different ways to deal with this problem but the one I’ve found the best is to use an allowance. Each month both spouses get a certain amount of money in cash that they can blow on whatever they want. I find this to be the best solution as it keeps the saver from constantly nagging the spender about wasting money on crap, it lets the spender buy whatever they want without being hassled, and it lets the saver sleep like a baby knowing that their cash isn't getting blown.

Insider Trading

I just wanted to let readers know about this resource that I came across:

http://www.canadianinsider.com/

The site allows you to see which corporate insiders are accumulating or selling shares. Personally I don’t put very much importance on insiders selling as they could be selling for a number of reasons unrelated to the future of the company (ie- purchasing a new yacht, divorce, etc...) However, I believe that insider buying can be a powerful indicator of insiders’ opinion on the future of the company. It’s reassuring as a small investor to see corporate big wigs put their money where their mouth is. They live and breathe the company and if they think the company is cheap enough to buy then I definitely think it’s worth a look.

Dividend Growing Stocks - I

A big fat juicy dividend is nice but...in my opinion a modest but rapidly growing dividend is better. So I thought that every once in a while I’ll point out which stocks I think are high quality, stable, long term dividend growers.

I’ll start off with: 3M (MMM)
-49 years of consistent dividend growth.
-362 consistent quarters of paying a dividend
-Current yield of 2.5%

Bank Comparison Website - A Middle Class Rant III

I came across this website ( http://www.moneytools.ca ) while doing my daily read at http://www.milliondollarjourney.com. It is an online guide to bank fees created by the Canadian Government. It provides you with the “tools you need to help you shop around for bank accounts, credit cards and other financial products from the comfort of your home.” The site allows you to search for the best product based on: location, minimum balance, age, number of transactions a month etc...

Although the site could be useful for some people I don’t like the fact that the government has gone ahead and wasted time and money on the construction of it (if an individual or business created it then hey no problem). In my opinion it’s really none of the governments business. I think that consumers are smart enough to shop around on their own (and if not then the dumb ones can pay a higher fee and raise the EPS of my bank stocks). Part of my problem with the government poking its’ nose into bank fees has to do with the fact that bank fees really aren’t that high (I bank at a big bank and pay $0 a year in fees). Why is the government wasting time and resources in an effort to save Canadians a few dollars a month at best? Additionally, the type of people who are going to be visiting the site are mainly going to be financially savvy people like you and me who probably don’t pay many fees anyways. Those who pay extravagantly high bank fees probably won’t use the site, because if they’ve been dumb enough to pay high fees up to now and haven’t done anything about it why is this website going to make a difference?

Since when is the government in the business of being a comparison shopper for consumers anyways? What’s next? Restaurants? Hotels? Groceries? Actually, I think that a grocery comparison website would save the average Canadian far more money each year than the bank fee website (I converted a friend from A&P to No-Frills and he now saves about $30 a week in groceries --- for him that’s about 3 years worth of bank fees saved each week). Anyways...my point is the government should stick to governing (defense, infrastructure, health, education) and leave the rest up to the market.

Budget

Well big surprise… today I’m writing about the budget. In my opinion this budget had a lot of hype and very little substance. I (like many others) was expecting some announcement (or even direction) on were the government is going on capitals gains tax but...sigh...nothing...maybe next year… I’ve outlined the good and bad of the budget below.

The Bad
-No capital gains tax relief (despite the fact that this was a campaign promise). The exception to this is if you’re a small business owner, fisherman or farmer, who received an increase in the one time capital gains allowance from $500,000 to $750,000.

-No broad based tax cuts.

The Good
-If you make over $40,000 a year you’ll save $310 a year for each child (under 18).

-Eliminated the annual $4,000 RESP limit and raised the lifetime maximum to $50,000.

-Raised the maximum RESP grant limit (20% of annual contribution) from $400 to $500 annually

-Raised the age limit of RSP conversion from 69 to 71 (In my opinion this is a mixed blessing. Call me pessimistic but I think it’s the first step in increasing the receiving age of both CPP and/or OAS)

-If you buy a qualifying fuel-efficient car you could get a rebate of $1,000 to $2,000.

In my opinion none of the positive aspects of the budget even come close to being able to provide the same benefits as the promised, but not delivered relief from capital gains tax.