All posts by Pat McKeough

Myths about Dividend Stocks in RRSP vs TFSA: Busted

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Dividend investors love rules of thumb. Rules are comforting, like a warm blanket. Unfortunately, some of the most popular rules around dividend stocks in RRSP vs TFSA are only partly true.

The cost is usually quiet. You rarely see a dramatic mistake on a single statement. Instead, you get small leaks that compound: a bit of withholding tax you cannot recover, a little extra taxable income later than you expected, and a placement decision that is hard to unwind without triggering tax.

Here is a myth-by-myth cleanup, with practical takeaways you can apply without needing a spreadsheet the size of Manitoba.

Myth #1: TFSA is Always Best for Dividends

Why it sticks: a TFSA is tax-free in Canada, so it sounds like the obvious place for any income.

The reality is more nuanced. A TFSA is often an excellent home for dividend income, but not every dividend behaves the same way once cross-border tax rules enter the room.

What’s true (and what’s not):

A TFSA is great for many dividend investors, especially when flexibility matters. The part that breaks is the word “always.”

The key exception: U.S. dividends in a TFSA

U.S. dividends paid into a TFSA commonly face 15% U.S. withholding tax, and the TFSA usually does not let you recover that amount. The Canada U.S. tax treaty generally treats RRSP and RRIF type plans differently than a TFSA for this purpose.

This is the classic U.S. dividend withholding tax TFSA vs RRSP issue. It is not theoretical. It shows up as less cash hitting your account.

When a TFSA is often best for dividends

A TFSA is often a strong home for:

  • Canadian dividend payers (TSX stocks and many Canadian-listed dividend ETFs), since there is no U.S. withholding problem on Canadian dividends
  • investors who value tax-free withdrawals and flexibility later
  • people who want retirement income planning that does not add to taxable income

Takeaway: A TFSA is fantastic, but it is not automatically best for every dividend source.

Myth #2: U.S. Withholding gets Refunded in a TFSA

Why it persists: investors remember that in a taxable account, foreign withholding can sometimes be offset with a foreign tax credit, so they assume the TFSA works the same way.

Reality: inside a TFSA, the U.S. withholding is generally not recoverable because you cannot claim the foreign tax credit there.

RRSP vs TFSA: the simple $100 dividend example

Using round numbers:

  • U.S. dividend in TFSA: $100 declared, $85 received (15% withheld, typically unrecoverable)
  • U.S. dividend in RRSP: $100 declared, $100 received (treaty relief commonly applies when held properly)

That 15% gap is not a one-time annoyance. If you reinvest and hold for years, it compounds.

Takeaway: if you hold U.S. dividend payers inside a TFSA, plan for some permanent leakage.

Myth #3: DRIPs are Taxed inside RRSP/TFSA

Why people think this: in non-registered accounts, reinvested dividends are still taxable each year, so it feels like reinvestment must create a tax event everywhere.

Reality: registered accounts are designed so you do not report income annually.

  • TFSA: investment income and growth in the account are tax-free
  • RRSP/RRIF: investment income is tax-deferred, and withdrawals are taxed as income later

So a DRIP inside an RRSP or TFSA does not trigger annual Canadian tax reporting.

One practical record-keeping note

In taxable accounts, adjusted cost base tracking matters, especially with DRIPs.
Inside RRSP and TFSA accounts, adjusted cost base tracking is generally not required for Canadian tax reporting because you are not reporting gains each year.

Takeaway: DRIP taxes are a taxable-account headache, not a registered-account one.

Myth #4: RRSP Withdrawals are “Lightly Taxed,” just like TFSA

Why it trips people up: the RRSP deduction at contribution time is memorable, so people assume the withdrawal has special treatment too.

Reality, stated plainly: RRSP withdrawals are taxed as ordinary income. They do not come out as dividends, and you do not get the dividend tax credit on the way out.

This matters for dividend-focused RRSP portfolios because the income can stack on top of CPP, OAS, and other retirement income sources.

Two income-planning issues that surprise dividend investors 

  1. RRIF minimum withdrawals can force taxable income once you convert, and the minimum usually rises with age.
  2. Higher taxable income can increase OAS recovery tax risk. TFSA withdrawals do not add to taxable income, but RRSP and RRIF withdrawals do.

Bottom line for dividend investors:

  • RRSP: tax-deferred growth now, taxable income later.
  • TFSA: tax-free growth and tax-free withdrawals.

Takeaway: the account wrapper changes the after-tax experience, even if the underlying holdings look the same.

Myth #5: All Dividend ETFs face the same Withholding

Why it sounds reasonable: an ETF is “just a wrapper,” so withholding must be the same everywhere.

Reality: withholding can vary based on: Continue Reading…

Why Secular Trends beat Market Indicators

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Forget about market indicators–picking up on secular trends is a much better way to spot top stocks

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Investors sometimes ask how I learned about investing and the stock market. The answer is that I started early, read a lot, and learned how to write so that readers understand what I’m saying.

I got started as a teenager, with a part-time job for an investment writer. My job was to gather and organize information on public companies and the economy. This called for a lot of reading, but I was always an avid reader.

Learning how to write easy-to-read material is also a plus. After all, you have to understand information to be able to explain it to others.

During my first full-time decade in the investing business, I learned that many factors influence market trends. Naturally, I tried to learn about or create market indicators that could tell me how these factors could help my investing. Gradually it dawned on me that most market indicators turn out to reflect the fact that random events tend to occur in bunches.

Some of these bunches are big enough and last long enough that you can mistake them for sure signs that the market is headed in a particular direction.

The four-year U.S. Presidential Election indicator is different. It’s the most valuable market indicator I know of because it takes advantage of recurring cycles in the U.S. Presidential Election cycle. It’s still far from perfect. However, you might say that every few years, it gives investors a helpful nudge in the right direction.

The four-year rule is of little interest to many investors, particularly those who are new to the game. They lack the patience for it. Over the years, I’ve talked to many young investors who seem more interested in short-term trading than in our long-term Successful Investor approach.

From their point of view, they don’t need to obsess about risk because they don’t have enough investment capital to worry about losses. They say they’ll switch to our approach when they’ve made a windfall in something that works out as they hoped. When they have more money to risk, they’ll be more careful with it.

The trouble is that since they disregard risk, they may never acquire the gains they hope for. All too often, they get sucked into one bad investment after another. These include short-term trading (particularly in so-called meme stocks), dabbling in stock options or IPOs or SPACs or cryptocurrencies or NFTs. Dabblers fail to see that the big gains in these opportunities go to those who sell them to the investing public.

Secular trends beat market indicators

In the 1980s, I lost interest in market indicators and began to focus on secular trends. These are economic trends that last longer (sometimes much longer) than the typical prosperity/recession cycle.

Back then, for instance, goldbugs were sure that federal deficit spending was responsible for the high inflation of the period. It seemed to me that they were paying too little attention to the economic changes going on, particularly the impact of the baby boomers’ entry into the workforce. When employers hired boomers, it raised costs, since these newcomers needed training (particularly women who were going to work in higher numbers than previously). Continue Reading…

Arbitrage in the Stock Market is your Friend, Especially with an AI Assist

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If you are Canadian and you buy or sell U.S. stocks, you need to remember that arbitrage in the stock market is your friend, all the more so when it has an assist from AI, or Artificial Intelligence.

Arbitrage is the simultaneous purchase and sale of an asset in different markets, to exploit tiny differences in prices. We take advantage of it for our Portfolio Management clients whenever we can, to cut their trading costs. Here’s how it works:

If we’re selling a Canadian stock for a client and plan to use the proceeds to buy a U.S. stock, we offer the Canadian stock (on a Canadian or U.S. exchange) for sale in U.S. funds. When we want to sell a U.S. stock to buy Canadian, we reverse the order and offer the U.S. stock for sale in Canadian funds.

Now that you can buy and sell in either currency on both sides of the border, arbitrageurs (also known as “arbs” — traders who buy and sell in two different currencies simultaneously) constantly monitor trading activity to spot slight differences in one currency versus the other. When they spot any such difference, they simultaneously buy the stock where it’s cheaper and sell it where it’s more expensive, eking out a tiny profit on the difference.

This trading activity serves to cut cross-border share-price differences to the point where they are, for practical purposes, negligible. This makes the markets more liquid. It cuts trading costs for everybody. Continue Reading…

7 ways to tell if a stock pays a solid Dividend and will keep doing so

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We believe investors will profit most, and do so with the least risk, by buying shares of well-established, dividend-paying stocks with strong business prospects.

That then raises the question, how to tell if a stock pays a solid dividend? How to find out if a stock pays dividends is an important skill for investors.

The best companies to invest in for dividends have strong positions in healthy industries. They also incorporate strong management that makes the right moves to remain competitive in changing marketplaces.

How to tell if a stock pays a sustainable dividend?

These types of stocks give investors an additional measure of safety in today’s volatile markets. And the best ones offer an attractive combination of moderate p/e’s (the ratio of a stock’s price to its per-share earnings), steady or rising dividend yields (annual dividend divided by the share price), and promising growth prospects.

Today we’re going to look at how to tell if a stock pays a dividend and — more important — if it’s likely to keep paying it. You’ll want to recognize these stocks when they are available. Learning how to find out if a stock pays dividends can help you make informed investment decisions.

But first, let’s quickly recap the value of dividends and dividend-paying stocks by looking at some reasons for investing in them.

Why invest in dividend stocks?

1.) Growth and income. The best dividend-paying stocks offer both capital-gains growth potential and regular income from dividend payments.

2.) Dividends can grow. Stock prices rise and fall, so capital losses can follow capital gains, at least temporarily. Interest on a bond or GIC holds steady, at best. But top-quality dividend-paying stocks like to ratchet their dividends upward: hold them steady in a bad year, raise them in a good one. That gives you a hedge against inflation.

3.) Dividends are a sign of investment quality. Some good companies reinvest profit to spur growth instead of paying dividends. But fraudulent and failing companies are hardly ever dividend-paying stocks. So if you only buy stocks that pay dividends, you’ll automatically stay out of almost all the market’s worst stocks.
For a true measure of stability, focus on those companies that have maintained or raised their dividends during a recession or stock-market downturn. That’s because these firms leave themselves enough room to handle periods of earnings volatility. By continually rewarding investors, and retaining enough cash to finance their businesses, they also provide an attractive mix of safety, income and growth.

4.) Dividend income gets favourable tax treatment. Taxpayers who hold Canadian dividend-paying stocks get an additional bonus. Their dividends are eligible for the dividend tax credit in Canada. This means that dividend income will be taxed at a lower rate than the same amount of interest income (investors in the highest tax bracket pay tax of about 25% on dividends, compared to about 54% on interest income). Investors in the highest tax bracket will now pay tax on capital gains at a rate of roughly 27%.

The 7 suggestions

1.)  How to tell if a stock pays a dividend? Look for companies with long-term success. These companies are the most likely to keep paying and increasing their dividends. Continue Reading…

5 Key Factors that Influence Investment Decisions every Investor should know

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Understand the factors that affect investment decisions so you maximize your portfolio returns

TSInetwork.ca

It’s generally a waste of time to obsess about a short-term downward movement in the economy, stock market or both.

These downward movements can occur for a wide variety of reasons, at any time: even outside the kind of significant downturn caused by COVID-19 or, more recently, higher inflation and the Russian invasion of Ukraine, or the current U.S./Israel attack on Iran.

Still, for every “real” short-term downturn, you can spot a dozen fake-outs: situations where the market or economy looked like it was going into a tailspin but pulled out of the drop and began rising at the last minute.

On the other hand, it does pay to obsess about factors that affect investment decisions like portfolio diversification, investment quality, and the extent to which your portfolio suits your personal goals and temperament.

1.) What is the appropriate asset allocation for my portfolio?

A diversified investment portfolio should be spread across multiple asset classes for risk management and potential growth. The main components typically include:

Stocks provide growth potential and can help protect against inflation over the long term. They tend to be more volatile but historically offer higher returns.

Bonds offer steady income and help reduce overall portfolio risk. They generally provide more stability than stocks but lower potential returns.

Cash equivalents, like money market funds or GICs, offer safety and liquidity but usually provide the lowest returns.

The specific percentage allocated to each depends on your personal circumstances, but maintaining this basic diversification helps balance risk and return potential.

Remember that regular rebalancing helps maintain your target allocation as market values change over time.

Spread your money out across most if not all of the five main economic sectors (Finance, Utilities, Manufacturing, Resources, and the Consumer sector). The proportions should depend on your objectives and the risk you can accept. The Finance and Utilities sectors generally involve below-average risk. Manufacturing and Resources tend to be riskier, and the Consumer sector is in the middle.

As well, balance aggressive and conservative investments in your portfolio, in line with your investment objectives and the market outlook. Above all, avoid the urge to become more aggressive as prices rise and more conservative as prices fall.

Discover more about properly diversifying your portfolio.

2.) How do I find quality investments?

Quality investments can be identified by examining key financial metrics such as consistent revenue growth, stable profit margins, low debt levels, strong cash flows, and competitive advantages within their industry.

The best blue-chip stocks offer strong investment quality. When the market suffers a significant downturn like that prompted by the emergence of the coronavirus pandemic, these stocks generally keep paying their dividends, and they are among the first to recover when conditions improve.

In keeping with the Successful Investor philosophy, we feel stocks that have been paying dividends for five years or more are some of the safest investments you can have. Dividends are a sign of quality and a company’s financial health. Canadian banks and utilities are among the income-paying stocks that we consider to be safer investments.

Learn more about developing a long-term strategy focused on stocks with high investment quality.

3.) Why is it important to have a disciplined savings plan?

A disciplined savings plan creates financial stability by building wealth consistently, protecting against emergencies, and helping achieve long-term goals through the power of compound growth.

If there is one piece of personal wealth management advice you should immediately implement, it’s to have a disciplined plan for saving during your working years. This, above all things, can set you up for optimal investment gains. We talk more about this in 9 Secrets of Successful Wealth Management, which is free for you to download.

Many of our wealth management clients live off their investments. From time to time, they need to sell some of their holdings to supplement their dividend income. But rather than trying to predict price changes or spot highs and lows, we ensure that decisions affecting the client’s portfolio are tailored to his or her circumstances and temperament.

4.) How can I find hidden assets on a company’s balance sheet?)

A company’s hidden assets can be uncovered by analyzing the footnotes in financial statements, examining goodwill valuations, reviewing off-balance sheet items like operating leases or joint ventures, and investigating intangible assets like patents, brand value, and customer relationships. Continue Reading…