All posts by Pat McKeough

Is it too late to invest in Canadian marijuana stocks?

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Canadian marijuana stocks may move higher on momentum as the Oct. 17, 2018 date for legalization approaches, but they need significant revenue growth to justify their huge market caps.

Share prices for many Canadian marijuana stocks have soared since mid-2016. The speculative appeal of marijuana stocks continues to attract investors looking for a “ground-floor opportunity.” However, the pioneers in an industry are not always the ones who survive.

Canadian marijuana stocks need more revenue growth

The barriers to entry are low for new competitors in Canadian marijuana stocks. If demand rises rapidly, tobacco companies and other big producers will likely enter the market.

Canadian marijuana stocks may move higher on momentum — but they need significant revenue growth to justify their huge market caps (the value of all shares outstanding).

A new crop of penny stocks are sprouting

Now that marijuana stocks have proven popular with investors and have given them big returns, investors looking to add to the aggressive portion of their portfolios may turn to the higher-risk strategy of buying speculative marijuana penny stocks.

However, there are several potential risks when investors venture into penny stocks in general.

Buying low-quality Canadian penny stocks is one of those things that can appear to be successful before it goes wrong. Some get hooked on it, since low-quality stocks can be highly profitable over short periods. That’s because they are generally more volatile than high-quality stocks.

Avoid ‘pot-of-gold’ stocks if you invest in Canadian marijuana

Penny stocks can attract investors with their low prices and promises of high returns when they pay off. Yet the odds against success are very high with these speculative stocks. And they can provide fertile ground for stock promotions and investing scams. Penny stocks can be more easily manipulated than most stocks because of thin trading and price volatility. Continue Reading…

How dividends are taxed: a close look at the dividend tax credit

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Discover what you need to know to answer the question, “How are dividends taxed in Canada?”

Taxpayers who hold Canadian dividend-paying stocks get a tax break. Their dividends can be 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 29% on dividends, compared to about 50% on interest income. Investors in the highest tax bracket pay tax on capital gains at a rate of roughly 25%.

As mentioned, Canadian taxpayers who hold Canadian dividend stocks get a special bonus. Their dividends can be eligible for the dividend tax credit in Canada. This dividend tax credit — which is available on dividends paid on Canadian stocks held outside of an RRSP, RRIF or TFSA — will cut your effective tax rate.

This means that dividend income will be taxed at a lower rate than the same amount of interest income.

How are dividends taxed in Canada? An example:

If you earn $1,000 in dividend income and are in the top 50% tax bracket, you will pay about $290 in taxes.

That’s a bit more than capital gains, which offer tax-advantaged income as well. On that same $1,000 in income, you will only pay $250 in capital gains taxes.

But it’s a lot better than the roughly $500 in income taxes you’ll pay on the same $1,000 amount of interest income.

The Canadian dividend tax credit is actually split between two tax credits. One is a provincial dividend tax credit and the other is a federal dividend tax credit. The provincial tax credit varies depending on where you live in Canada.

Note that apart from the Canadian dividend tax credit giving you a major tax-deferral opportunity, dividends can supply a big part of your overall long-term portfolio gains.

When you add in the security of stocks with dividends going back many years or decades—plus the potential for tax-advantaged capital gains on top of dividend income: Canadian dividend stocks are an attractive way to increase profit with less risk.

How are dividends taxed in Canada? Savvy investors respect the advantages of dividends

Dividends don’t always get the respect they deserve, especially from beginning investors. Continue Reading…

The reverse mortgage pitfalls you need to know about

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Canadian seniors may borrow on their home equity in the form of a reverse mortgage — but should they?

Money lenders are always coming up with innovative ways for you to borrow money. One such innovation is the reverse mortgage. Interest in reverse mortgages is rising with an aging population and low interest rates on savings accounts. As a result, we hear from our Inner Circle members periodically asking whether a reverse mortgage would be a good way to tap into the equity they have built up in their homes.

Reverse mortgages in Canada let homeowners who are 55 years of age or older borrow on their home equity—the minimum age was 60 until a year ago. (For married couples, both spouses must be above age 55). Typically, the loan-to-value ratio is up to 40%. But depending on their age and property, some borrowers may qualify for a loan of up to 55% of the value of their home. The loan and accumulated interest are repaid only after the house is sold or from the proceeds of the homeowner’s estate.

Reverse mortgages are best seen as loans of last resort

Continue Reading…

How to win at tax-free investing: RRSPs, TFSAs and Dividend Stocks

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Tax-free investing can help you save money over both the long and short term if you invest using these tips.

Tax-free investing and using tax shelters are strategies employed by many successful investors.

Tax shelters are legal investment vehicles that let investors pay less tax. While some are risky and should be avoided, like flow-through limited partnerships, others, like RRSPs and TFSAs, are great ways for Canadian investors to cut their tax bills.

Here are the best ways to defer or lower the amount of tax you have to pay on your investments.

Tax-free investing with Registered Retirement Savings Plans (RRSPs)

 

RRSPs are a great way for investors to cut their tax bills and make more money from their retirement investing. RRSPs are a form of tax-deferred savings plan. RRSP contributions are tax deductible, and the investments grow tax-free.

You can put money in RRSP tax shelters each year (up to a limit based on your income) and deduct it from your taxable income. You only pay income tax on your investment, and the income it earns, when you make withdrawals from your RRSP.

In a way, investment gains in RRSP tax shelters give you a double profit. Instead of paying up to 50% of your investment gains in taxes right after you make them, you keep 100% of them working for you until you take money out. That will likely be years later in retirement, when most Canadians enter a lower tax bracket.

If you want to pay less tax on investment income while you’re still working, investing in an RRSP is the way to go.

Tax-free investing with tax-free savings accounts (TFSAs)

A tax-free savings account lets you earn investment income — including interest, dividends and capital gains — tax free. But unlike registered retirement savings plans (RRSPs), contributions to tax free savings accounts are not tax deductible. However, withdrawals from a TFSA are not taxed.

TFSAs can generally hold the same investments as an RRSP. This includes cash, ETFs, mutual funds, publicly traded stocks, GICs and bonds.

Here are three tips you can use to make sure you’re getting the most profit—and tax benefits—from your TFSA:

1.) Keep higher-risk investments out of your TFSA: Holding higher-risk stocks in your TFSA is a poor investment strategy. That’s because high-risk stocks come with a greater risk of loss. If you lose money in a TFSA, you lose both the money and the tax-deduction value of the loss.

2.) Let your current income help you decide between your tax free savings account and RRSPs:RRSPs may be the better choice in years of high income, since RRSP contributions are deductible from your taxable income. In years of low or no income—such as when you’re in school, beginning your career or between jobs—TFSAs may be the better choice.

3.) Consider holding exchange-traded funds in your TFSA: It’s difficult to build a diversified portfolio within your TFSA. Instead, look to exchange-traded funds for TFSA investing.

Tax-free investing strategies can include saving on dividend taxes

Continue Reading…

Choose investments carefully when building dividend portfolios for long-term gains

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A dividend portfolio should focus on high-quality stocks with a proven record of paying dividends

High-growth dividend stocks offer investors a measure of security. Dividends, after all, are much more stable than earnings projections. More important, dividends are impossible to fake: either the company has the cash to pay them or it doesn’t.

It’s important to make sound moves while building a dividend portfolio. That’s why we recommend looking for dividend stocks that have a strong position in their market and have a history of building revenue and cash flow.

The best stocks for your dividend portfolio dominate their markets

When we suggest dividend stocks for a portfolio we look for dividend stocks that have industry prominence, if not dominance. Our reasoning, besides brand recognition, is that major companies can influence legislation, industry trends, etc. to suit themselves. Minor firms can’t do that.

How to avoid sabotaging your dividend portfolio

You may decide to vary how much money you invest every year, depending on your view of the market outlook. But nobody can consistently guess right about the market outlook. Trying to do so is likely to cost you money about half the time.

If you invest more money in years when you’re confident about the economy or market, you may wind up buying more shares when prices are high. If you cut back on your investing in years when the outlook is uncertain, you’ll buy fewer shares when stock prices are low.

Investors may go so far as to try to improve their returns by taking money out of the stock market when they feel risk is high. They often get this urge after a few weeks or months of bad financial news or unsettling political developments. By then, however, the market may have already dropped enough to offset any negative developments.

Often, these temporary sellers wind up buying their way back into the market when the news has improved and stock prices have gone above the price where they sold.

Some brokers encourage this costly practice. From time to time, they may advise clients to “take some money off the table,” setting up a false analogy between investing and gambling. That’s in a broker’s interest. Continue Reading…