It used to be that investors take their bonds into RRSPs to capitalize on the zero tax rate provided by these makes up about income-producing along with other securities, keeping their equities outside of registered accounts to consider benefit 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 there are never after tax.
What everything 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 suitable for your cash account, TFSA or perhaps your RRSP or RRIF.
It’s also important to note 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 obtain the full dividend payments.
That said, investors tend to trade less in their RRSPs, looking for steady equity investments that offer long-term stability and growth – whether they pay a dividend.
“Each one of these conventions should be broken when the right opportunity arrives,” said Norman Levine, managing director at Toronto-based Portfolio Management Corp. “What you want in your RRSP are things that are likely to increase your profits – a 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 managed to get an ideal buy-and-hold name. But it’s transforming itself from the financial services company, into the industrial conglomerate it was previously. As a result, Levine likes its prospects moving forward.
“The earnings are more predictable, there isn’t the same kind of federal regulation financial service companies face also it doesn’t consume just as much capital, so the market awards it a greater multiple,” he explained.
The strong U.S. dollar has made it hard for GE to earn money overseas, but that headwind will ultimately subside.
Meanwhile, it’s produced a dividend growth rate of 14 per cent over the past five years, and Levine expects another hike next quarter.
“I’m more interested in companies that regularly increase their dividends, rather than those 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 wages just keeps going up along with the stock,” he said. “It always sells at a high valuation, but is becoming more sensible, that is what attracted our attention.”
Power Financial Corp. (PWF/TSX), the financial services company that owns a big part stake in Great-West Lifeco Inc. as well as controls asset managers like Investors Group and Boston-based Putnam Investments, also offers a history of raising its dividend.
I’m interested in companies that regularly increase their dividends, instead of those with high yields that aren’t growing.
This stopped throughout the economic crisis, but the company resumed dividend hikes this year.
“We think it’ll carry on doing that,” Levine said. “It’ll benefit from rising rates of interest in the U.S., Europe’s economy beginning 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 offers a dividend yield of about four percent, but Takacsy thinks there is plenty of room for dividend growth.
“The climate change issue will put more focus on renewables, so companies with expertise for example Boralex are going to be the main beneficiaries,” he explained.
The company’s primary focus is wind projects in Quebec and France, although it also has contact with solar and hydro.
What’s most engaging to Takacsy may be the large number of projects Boralex has within the pipeline, that ought to lead to its EBITDA doubling between 2014 and 2017.
Innergex Renewable Energy Inc. (INE/TSX) is much more focused on hydro projects, with almost all of its operations in Canada. However, Takacsy observe that it’s seeking 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 put away type names, with dividends which should grow,” he said.
The telecom sector is definitely an area investors flocked to for stability and growth, and its where Takacsy highlighted Telus Corp. (T/TSX).
“It’s taking advantage of the insatiable appetite for data and video, but they’re also one of 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 leader Darren Entwistle does all the right things.
“It’s been a great wealth creator and should continue to do so,” he said.
While many investors are shying from anything energy-related nowadays, Takacsy thinks it has created a chance in Pembina Pipeline Corp. (PPL/TSX).
“It’s a steal at this price and it has a very safe dividend,” he explained. “Their EBITDA will skyrocket over 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 five years.
“It’s an execllent name to buy and put away in an RRSP,” Takacsy said.
Illustration by Chloe Cushman, National Post