All posts by Pat McKeough

U.S.-listed ADRs: A Smart way for Canadian Investors to buy Foreign Stocks

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ADRs (American Depository Receipts) are a great way for Canadian investors to invest in foreign stocks

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Our view on foreign investing is that for most investors, U.S. stocks can provide all the foreign exposure they need.

We also feel that virtually all Canadian investors should have 20% to 30% of their portfolios in the U.S. stocks that we recommend in our Wall Street Stock Forecaster newsletter.

What is an ADR?

An ADR (American Depositary Receipt) is a negotiable certificate issued by a U.S. bank that represents shares of a foreign company, allowing American investors to buy and trade foreign stocks on U.S. exchanges in U.S. dollars without dealing with foreign currencies or international brokerages: essentially making it easier for Americans to invest in companies like Nestlé, Toyota, or Diageo plc through their regular  brokerage accounts.

How do ADRs differ from regular U.S. stocks?

ADRs differ from regular U.S. stocks in several key ways: they represent foreign companies traded in U.S. dollars on U.S. exchanges but carry additional fees (administrative costs, currency conversion expenses), often lack voting rights, may have lower liquidity and wider bid-ask spreads, face foreign exchange rate risk, and have different regulatory reporting requirements depending on their level (I, II, or III), while regular U.S. stocks offer direct ownership with full voting rights, higher transparency, and typically lower costs.

What’s the difference between sponsored and unsponsored ADRs?

Sponsored ADRs are created with the cooperation and agreement of the foreign company, which works directly with a U.S. depositary bank that handles recordkeeping, paperwork, and dividend payments, while unsponsored ADRs are issued by broker-dealers without the foreign company’s involvement, participation, or even consent, and may not meet full SEC requirements: sponsored ADRs generally offer better investor protections and more reliable information than unsponsored ones.

Why should a Canadian investor consider ADRs?

A Canadian investor should consider ADRs to gain easy access to foreign companies, particularly from Europe, Asia, and emerging markets. That allows for greater portfolio diversification beyond North American markets while trading in familiar US-dollar-denominated securities on major U.S. exchanges like the NYSE and Nasdaq: all the while eliminating the complexity of dealing with multiple foreign currencies and international brokerage accounts.

If you want to add more foreign content, you could buy individual stocks. But for most investors, directly investing in foreign stocks can add an extra layer of risk and expense. As well, timely and accurate information about overseas companies is not always available, and securities regulations vary widely between countries. It can also be hard for your broker to buy shares on foreign markets without paying a premium. Tax rules and restrictions on transferring funds between nations add further uncertainty and cost.

Understanding the ins and outs of ADRs

All in all, we think the best way to invest in foreign stocks is to buy high-quality firms that trade on the New York Stock Exchange as American Depositary Receipts (ADRs). An American Depositary Receipt is a U.S. traded proxy for a foreign stock and represents a specified number of shares in that foreign corporation.

ADRs are bought and sold on U.S. stock markets, just like regular stocks, and are issued or sponsored in the U.S. by a bank or brokerage firm. If you own an ADR, you have the right to obtain the foreign stock it represents. However, investors usually find it more convenient to continue to hold the ADR and to sell the ADR when it no longer serves their needs.

One ADR certificate may represent one or more shares of the foreign stock. Or, if the stock is expensive, the ADR may represent a fraction of a share; that way the ADR will start out trading at a moderate price or be in the range of similar securities trading on the U.S. exchange. Continue Reading…

Mining Stocks that pay Dividends

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Add to your long-term returns in the resource sector by investing in mining stocks that pay dividends

At TSI Network, we keep a sharp eye out for high-quality mining stocks that pay dividends.

Dividends are typically cash payouts that serve as a way companies share the wealth they’ve accumulated through operating the company. These payouts are drawn from earnings and cash flow and paid to the shareholders of the company. Typically, these dividends are paid quarterly, although they may be paid annually or even monthly.

Dividends can now contribute up to a third of your long-term investment returns, without even considering the tax-cutting effects of the dividend tax credit. In addition, dividends are far more reliable than capital gains. A stock that pays a $1 dividend this year will probably do the same next year. It may even increase its dividend payment.

Many investors buy gold stocks as a hedge against inflation, and some gold stocks pay dividends. But there are other mining stocks that also offer an inflation hedge: and on average pay higher dividends.

Copper stocks generally have higher dividend yields than gold stocks because they have steadier demand and more stable prices. As well, they’re usually much cheaper than gold stocks in relation to their earnings and cash flow. That means they potentially have less room to fall if markets in general fall. That’s also another way of saying that they can be less risky than gold.

Long term, copper should gain from rising demand and tighter supply. Major deposits are depleting, and environmental issues are holding back new mines.

Nutrien (symbol NTR on Toronto) is one of our favourite Canadian dividend-paying mining stocks. The company is the world’s largest producer of agricultural fertilizers, including mined potash. It took its current form on January 1, 2018, when Agrium Inc. (old symbol AGU) merged with rival Potash Corp. of Saskatchewan (old symbol POT). The stock is well-suited to income-seeking investors. The company has increased its dividend by an average of 5.8% annually in the past five years. That dividend yields 3.4%.

 

What’s a mining stock?

Mining stocks are investments in companies that produce or explore for minerals, such as uranium, coal, molybdenum (which is used in steelmaking), copper, silver and gold.

Mining stocks can generally be broken up into two categories, majors and juniors. Majors are mining companies that have been in the mining business for many years and more often than not they operate on a global scale. Majors have proven methods for exploration and mining, and have consistent output year over year.

Junior mining stocks are mining companies that are new or have been in business for a decade or less. They are usually smaller companies and take on risky mining exploration. If a junior mining stock is successful at finding and mining, it can mean huge returns for investors.

 

4 ways you benefit when you invest in mining stocks that pay dividends

  1. Growth and income. The best dividend-paying stocks offer both capital-gain growth potential and regular income from dividend payments. In fact, dividends are likely to still be paid regardless of how quickly the price of the underlying stock rises.
  2. Dividends can grow. Stock prices rise and fall, so capital losses often follow capital gains, at least temporarily. Interest on a bond or GIC holds steady, at best. But top dividend paying stocks like to ratchet their dividends upward—hold them steady in a bad year, raise them in a good one. That also gives you a hedge against inflation. Continue Reading…

Ideally, what does a diversified portfolio look like? Here are some top examples

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What does a diversified portfolio look like? A well-diversified portfolio balances risk by spreading investment holdings out across industry sectors and more

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What does a diverse portfolio look like? It’s a question we hear often from the Pat McKeough Inner Circle. We believe a well-diversified portfolio has a few specific qualities, including holdings spread out across most if not all of the five main economic sectors, geographic diversification, both conservative and more-aggressive holdings, and both market leaders and laggards. These asset allocation strategies help ensure long-term stability.

All in all, you will improve your chances of making money over long periods, no matter what happens in the market, if you diversify your holdings as we recommend, and so successfully answer the key question: what does a diverse portfolio look like?

What does a diversified portfolio look like? Holdings in the five main sectors

As we recommend to the Pat McKeough Inner Circle, we believe you spread should your money out across most, if not all, of the five main economic sectors: Manufacturing & Industry; Resources & Commodities; Consumer; Finance; and Utilities.

Here are some tips on diversifying your stock portfolio by sector:

  • When it comes to answering the question what does a diverse portfolio look like? remember stocks in the Resources and Manufacturing & Industry sectors expose you to above-average share price volatility.
  • Stocks in the Utilities and Canadian Finance sectors, however, entail below-average volatility.
  • Consumer stocks fall in the middle, between volatile Resources and Manufacturing companies, and the more stable Canadian Finance and Utilities companies.

Most investors should have investments in most, if not all, of these five sectors to successfully answer the question what does a diverse portfolio look like? The proper proportions for you depend on your investment temperament and circumstances. These asset allocation strategies should be reviewed regularly.

The Pat McKeough Inner Circle, like most conservative or income-seeking investors, may want to emphasize utilities and Canadian banks for their high and generally secure dividends. Regardless, it always pays to look closely at a company’s recent acquisitions and the risk associated with that growth strategy.

More-aggressive investors might want to increase their portfolio weightings in Resources or Manufacturing stocks.  However, at the same time, you’ll want to spread your Resource holdings out among oil and gas, metals and other Resources stocks for diversification within the sector, and for exposure to a number of areas.

What does a diverse portfolio look like? Balanced across geography

As it’s a mistake to focus your portfolio on a company that relies on a number of recent acquisitions for growth, one of the worst things you can do is invest so that your portfolio would suffer a great deal due to a localized downturn in any one city, province or state. Good portfolio management also means balancing your investments geographically.

Like the Pat McKeough Inner Circle’s most successful investors, you should avoid focusing your portfolio on any one country or region. And a lower-risk way to add international exposure to your portfolio is to hold multinational U.S. stocks such as, say, IBM, McDonald’s and Walmart. We cover all three of these companies in our Wall Street Stock Forecaster newsletter. Continue Reading…

Consider all Retirement Investment Management Options for a Financially Sound Future

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Here’s a look at some of your best retirement investment management options and choices. These include pensions, RRSPs, RRIFs and more.

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Your retirement investment management plan should build in contingencies for long-term medical needs and supplemental health insurance. As well, you should factor in caring for loved ones who are unable to take care of themselves.

When you work out a plan for your retirement, make sure that you aren’t basing your future income on overly-optimistic calculations that will end up leaving you short.

Retirement income can come from many different sources, such as personal savings, Canada Pension Plan, Old Age Security, company pensions, RRSPs, RRIFs, and other types of investment accounts.

 

Learn how your retirement investment management works in a Canada Pension Plan (CPP)

The Canada Pension Plan, or CPP, is the name for the Canadian national social insurance program. The program pays out based on contributions, and it provides income protection for individuals or their survivors in the instance of retirement, disability or death. Since 1999, the CPP has been legally permitted to invest in the stock market.

Nearly all individuals working in Canada contribute to the CPP, unless they live in Quebec, where the Quebec Pension Plan (QPP) exists and provides comparable benefits.

Applicants can apply to receive full CPP benefits at age 65. The CPP can be received as early as age 60 at a reduced rate. It can also be received as late as age 70, at an increased rate.

Here’s a look at some of the pensions or benefits provided by the Canada Pension Plan:

  • Retirement pension
  • Post-retirement pension
  • Death benefit
  • Child rearing provision
  • Credit splitting for divorced or separated couples
  • Survivor benefits
  • Pension sharing
  • Disability benefits

Use a Registered Retirement Savings Plan (RRSP) as a starting place when you look into retirement investment management

An RRSP is a great way for investors to cut their tax bills and make more money from their retirement investing.

RRSPs were introduced by the federal government in 1957 to encourage Canadians to save for retirement. Before RRSPs, only individuals who belonged to employer-sponsored registered pension plans could deduct pension contributions from their taxable income.

RRSPs are a form of tax-deferred savings plan. They are a little like other investment accounts, except for their tax treatment. RRSP contributions are tax deductible, and the investments grow tax-free.

You might think of investment gains in an RRSP as a double profit. Instead of paying up to, say,  50% of your profit to the government in taxes and keeping 50% to work for you, you keep 100% of your profit working for you, until you take it out.

Convert an RRSP to a RRIF to create one of the best investments for retirement

A Registered Retirement Income Fund (RRIF) is another good long-term investing strategy for retirement.

Converting your RRSP to a RRIF is clearly one of the best of three alternatives at age 71. That’s because RRIFs offer more flexibility and tax savings than annuities or a lump-sum withdrawal (which in most cases is a poor retirement investing option, since you’ll be taxed on the entire amount in that year as ordinary income). Continue Reading…

Canadian Utility ETFs offer Lower Risk and tax-advantaged dividends

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Utility investments typically benefit from stronger economic activity, and a top Canadian utilities ETF will let you take advantage of this: if you watch for low fees and sound stock holdings

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Utility stocks are shares in companies that provide electric power, telecommunications, pipeline services and so on. Canadian utility shares have always been great sources of tax-advantaged distribution income.

While most utility stocks are steady income producers, some utilities also offer opportunities for growth. This happens mostly when utilities expand into new markets or geographic regions.

We still feel that investors will profit the most with a well-balanced portfolio of high-quality individual stocks, but ETFs can also play a role in a portfolio.

Holding utilities, or a Canadian utilities ETF, can be a sound component of most investor portfolios.

What kind of companies are included in Canadian utilities ETFs?

Canadian utilities ETFs typically include companies from several sectors, such as electric utilities providing power generation and distribution, natural gas utilities, water utilities, telecommunications companies, and pipeline operators that transport energy resources.

What are the risks of investing in Canadian utilities ETFs?

The main risks of investing in Canadian utilities ETFs include regulatory changes that could affect utility companies’ profitability, interest rate sensitivity that can cause price drops when rates rise, and concentration risk if the ETF is heavily weighted toward a few companies or specific utility subsectors.

Characteristics of the best utility investments

The best utility stocks, or ETFs that hold them, can deliver predictable, lower-risk dividends.

Traditionally, the utilities sector is said to suffer when interest rates rise: or if the market is worried about a rise.

This is because utilities typically have a lot of debt as part of their capital structure, and higher rates make it more expensive to raise money and refinance existing debt. As well, their shares, which typically offer high yields, compete with fixed-income instruments for investor interest.

However, higher interest rates are usually accompanied by increased economic activity and growth. That stronger economic activity is good for utilities: It pushes up demand for their power and so on and at the same time boosts the electricity rates they charge their customers.

Regardless of those positives, as interest rates rise, investors often sell off, or avoid, utilities stocks, and that can push down their price. Given the formula for dividend yield — specifically, annual dividend rate/stock price — a falling stock price (the bottom number in the fraction) pushes up the yield. In other words, when the stock price goes down, its dividend yield goes up.

How are Canadian utilities ETFs structured?

Canadian utilities ETFs are typically structured to track specific indexes using different weighting methodologies, with equal-weight and market-cap approaches being the most common.

When looking for investments in the utility sector, investors should avoid judging a company based solely on its dividend yield. That’s because a high yield can sometimes be a danger sign rather than a bargain. For example, a company’s dividend yield could be high simply due to its share price having dropped sharply (because you use a company’s share price to calculate yield). That low price can be a sign of an imminent dividend cut.

Apart from a good dividend yield, the utility stocks you invest in should have a long history of paying (and raising) their dividends. For a true measure of stability, focus on those companies that have maintained or raised their dividends during economic and stock-market downturns.

 Are Canadian utilities ETFs a good investment for stability and income?

Canadian utilities ETFs typically provide stable income through consistent dividends and lower volatility compared to broader market investments, making them generally suitable for investors seeking stability and regular cash flow.

The best ETFs are focused on simple goals. Instead of picking and trading investments, operators of these ETFs manage investors’ money “passively,” with the goal of duplicating the performance of a market index. This lets the operator charge very low MERs (management expense ratios) compared to an average MER on conventional mutual funds of 2%-3%. Continue Reading…