Dividends are the “tried and true” investment focus these days (other than dollar cost averaging through indexing, of course) for those that say “screw off” to mutual funds and want to DIY invest.  Dividend paying stocks USUALLY have a proven track record and continue to give you dividend income even if the entire market isn’t doing so well in general.  However, they are not immune and are vulnerable to the huge market swings even if their dividend payout is strong.

Dividend Reinvestment Plans, also known widely as “DRIPS” essentially help you automatically take the dividend income you receive and reinvest it, usually without having to pay commissions or fees.  For example, the dividend income your receive may not be enough to purchase an entire share, but will allow you to purchase fractional shares.  Over time, these fractional shares add up to one share.

Usually these plans are offered directly by the company, and they will have their OWN brokerage they use for the DRiPs.  You can also choose to use your own brokerage (for me, that’s Questrade) but you won’t receive the discount of the 3-5% on the recent three closing prices of the stock.

Basically, with Dividend Reinvestment Plans, you can “set it and forget it”.  This option is especially alluring for those who have the “buy and hold” mentality, and actually rewards those who like to buy and hold.  Or in my case, prevents those who ideally WANT to buy and hold from panicking and selling their shares for a quick profit (I tend to suffer from that problem).

What Are the Benefits to DRIPping?

The benefits to DRIPing are numerous and I find that they do outweigh the cons.  That being said, I currently only have one DRiP for an individual stock going on right now (but my TD e-series funds are DRiP’d regularly), but I would like to add more (just needs some organization on my part!).

Currently I am DRIPing EIF.TO in my Questrade TFTA and I plan to add FTS.TO and perhaps HSE.TO to the list of DRIP’ing dividend stocks.

PROS:

• You’ll be investing and adding to your positions without having to pay fees or commissions
• Certain Canadian DRiPs give a discount of up to 5% on the price of the equity (usually 3-5% discount) on the average of the price in the previous five days the stock was traded on the TSX (basically you only pay 95-97% of the regular price)
• Compound interest is your friend over many years and much DRIPping
• Oftentimes you can designate the number of shares you want to DRiP
• Allows you to dollar cost average without having to put money in!

CONS:

• Investing in dividend stocks is investing in individual shares and not a basket of multiple shares so it carries inherent risk
• Inflexible at times- once you START a DRIP, you’ll often have to RE-APPLY for the DRiP for those new shares, if you ever add your positions to the dividend stock (so it’s merely annoying)
• You won’t get to see that money add up nicely in your account because it will be automatically reinvested
• Not all dividend paying stocks have DRiP available so you  need to check with the company website
• You’ll still have to pay taxes on the dividend income (even though its reinvested and you won’t necessarily “see” it) if it is in a non-registered investment account
• Sometimes certain brokerages do not allow for fractional shares to add up (like Questrade); therefore less compound interest for you!

How Do You DRIP?

It may seem really complicated but it’s actually pretty easy and straight forward to set up, especially if you use Questrade (though you don’t get the perks with that like 3-5% discount of the common share price).

DRiPing with Questrade

(I’m including this because a reader wrote in asking)

• Read this page on Questrade about dividend reinvesting first 
• Contact a Questrade representative (I called or chatted with them online) and ask about DRiPs.  They will send you an email with the form for the application.
• Fill out the application and mail it back to Questrade
• You may (will likely) need to call them back a week or two later to confirm they received your form and that your shares in the dividend stock will start DRiPing.
• Note that with Questrade, there is no discount for DRiPing but the good thing is that there are no brokerage fees/ commissions (but this is the case if you DRIP’d directly with the company too)

DRiPing directly with the company

• Check out the company’s webpage (e.g. I looked at EIF) for DRiP information and how to enroll (and check with your brokerage too!)
• Fill out the form and send it to the company
• See how much discount the company gives to the share price for DRiPing (usually 3-5%)
• Decide if you want to do a monthly cash purchase plan (e.g. dollar cost averaging) if the company has it available
• Sit back, relax, and enjoy the DRiP!

 Some great DRIP Resources

Here are some great websites to read up on to get you started on DRIP’ing.  Most of these are Dividend Blogs, understandably

• My Own Advisor
• The Dividend Ninja
• What is Dividend
• The DRIP investing Resource Centre

Related posts:

1. youngandthrifty’s Dividend Yields

Did I get your attention with the title of this post?  I sure hope so! 

I have seem many friendly stock pick contests between the big Canadian personal finance bloggers but was always too intimidated (or never asked lol) to participate.  Well, Financial Uproar apparently felt the same way too (I think he asked and was rejected) so he thought to create one of his own.  Financial Uproar asked if I wanted to participate in a Canadian underdog personal finance blogger stock picking competition.  His direct words were “because you all don’t suck, you’re all officially invited.”

I’m happy to participate and very interested to see how my picks go.  I just hope I don’t get the gag prize for finishing last (but knowing me, I probably will).  Coming from Financial Uproar, I have no idea what kind of gag prize he has in store.  If they’re chips, I’d be happy.  Though I highly doubt the gag prize will be something so benign as chips.

Here are my stock picks for 2012.  Lately, I’ve resigned (or more accurately, become smarter by choosing indexing) to indexing, but sometimes the gambler, speculator in me just enjoys the wild roller coaster ride of the Toronto Stock exchange.

Please be gentle regarding my picks! No judging lol!

You can also see Financial Uproar’s stock picks here.

Youngandthrifty’s 4 Stock Picks for 2012

Dollarama (DOL.TO)

Dollarama has 667 stores across Canada and they recently opened 57 new stores.  Dollarama became public in 2009, and since then, its stock has increased 93% and had a 25% increase through the first 9 months of 2011.  I know, because I’ve been watching it like a hawk.  I watched it at $30 and now it’s at $44.  I’m still watching it sadly, and kicking myself that I didn’t get in on the action.

It even started paying out a dividend of $0.09 per quarter.  Which makes the annual dividend yield 0.81%.  Small, I know, but hey, this company just came out in 2009.

I LOVE shopping at Dollarama.  It is my new favourite dollar store.  It has everything, I even bought my Christmas ornaments there.  If you need some weather stripping, they have it.  If you need a handsaw, they have it.  If you need some gift bags or birthday cards, they have it.

With the recent (and long drawn/ prolonged) economic downturn, everyone has been pinching their pennies and watching what they spend.  Frugal retailers and frugal fast food restaurants have done exceptionally well in these few years with everyone watching what they’re spending.  I see Dollarama continuing to do well even if the economy improves.  Once you shop here, you’ll not want to shop elsewhere because you can get so many things for so cheap.

Coastal Contacts (COA.TO)

Of course I wish to include a wild card, a growth stock.  If you haven’t heard of them before, they are Coastal Contacts and are also known as Clearly Contacts.  They are the largest and leading online retailer of contact lenses and glasses.  They were founded in 2000 (by Roger Hardy in a basement with one phone and a ping pong table apparently) and eliminated the need for people to pay an arm and a leg for glasses and contact lenses at the optician’s office or at expensive retailers.

In the first year of business, Coastal Contacts achieved $1 million in revenue.  They also have 2 million customers worldwide.

Most of the glasses you purchase at expensive stores are made in China anyway (like everything is) and Coastal Contacts eliminates the middle person, therefore you can get designer glasses or sunglasses at very reasonable prices.

They also run big promotions like giving away X number of glasses to the first X number of customers online.  Their major celebrity advertiser (at least here in Vancouver anyway) is Trevor Linden.

Its current price is $2.63 but unfortunately there isn’t much volume.  Its P/E is high, but this often seen with rapidly growing companies.

At this price, I don’t mind buying 1000 or even 100 shares (yeah, I know)  and anticipate future growth of the company.  They are also a Vancouver born and bred company, and many of you are well aware of my annoying allegiance to Vancouver!

Husky Energy (HSE.TO)

Some of you may remember that I have been keeping an eye on Husky Energy for a while.  It’s current price is $24.28 and its dividend yield is a healthy 4.94%.  It’s Price to Earnings ratio is 11.43. As you can see, its trading at a relatively low level compared to earlier in the year (though what investment isn’t I suppose).  The Price to Book ratio is also excellent.

Husky Energy is well diversified within the oil and gas industry, including involvement in exploration, upgrading crude oil, and retail gasoline.  Its headquarters is in Calgary and it is owned by the son of a multi-billionaire in Hong Kong, Li Ka Shing (eleventh richest person in the world).  So money isn’t really a concern in that regard.

In their website, they also talk about Aboriginal responsibility, and they train their staff to be sensitive to support and interactions with Aboriginal communities across Canada.  To me, that’s a plus one.  How this is actually enacted, I don’t know, but I hope they are as responsible in person as they appear on paper/ website.

 Bank of Montreal (BMO.TO)

Last but not least, I’m going to pick a bank stock.  Any Canadian bank would do, really, but I found that the price of BMO is more affordable for my stock portfolio budget than some of the other banks.  Canadian banks are notorious to be safe and probably the best in the world to invest in.

BMO’s current price is $54.95.  BMO’s 52 week low is $51.83  a has a 52 week high of $66.60.  Their Price to Earnings Ratio is 10.45.  Their dividend yield is 5.10% annually (which is better than any high interest savings account, IMO!).

However with the future being uncertain, I’m not sure how the big banks will fare in the coming year, to be honest.  As a long term pick (and I know that Financial Uproar is not looking for anything long term- lol did you get my little joke?), I think this is great.  For 2012, I’m not sure how it will do.

PS, are you proud of me readers?  I learned how to do a “picture shot” on my MacBook Pro! (yes, two years after owning it… told you I’m computer illiterate in some respects!)

Readers, what do you think of these picks?

Related posts:

1. Backgammon and the Stock Market

As you know, I sold off my Tax Free Trading Account portfolio (remember, it’s a “souped up” TFSA) and took the money out for the house down payment.  My portfolio was up about 20% Return on investment, but 2010 was such a great year for making gains on the stock market, I’m sure most people had similar returns (20% beats the 1.5% in a regular ol’ TFSA any day- though of course there is risk involved) .  I then transferred $5000 of my non-registered money (I sold a few loser stocks there as well) into the Tax Free Trading Account.  I will have $10,000 remaining that I can put in, and I plan to put my tax refund into my TFSA and RRSP this year too.

The reason why I sold off a lot of my TFSA portfolio was also because of the changes in terms of taxation on the income trusts I was holding- they had to convert to corporations and a lot of their distributions (read= 9-11% per year given back to you) were going to be slashed big time.

I thought I would share my picks for this year and give the reason why I chose the particular investment.  This year, it was more difficult to find bargains in terms of more bang for your buck because lots of stocks were trending at their 52 week highs.  Ideally, I would like for the stocks I pick to perform well (duh, who doesn’t?) but I would be happy if it stayed “status quo” too because they will pay me some juicy dividends anyway.

I think I’ll share what I invested with the way My Own Advisor did it by playing “Who are They?”, so you can guess and it’ll be more fun that way (SPOILER ALERT: he bought Fortis (FTS.TO), one of my all time favourite dividend payers).

Oh, and I’ll share one a week, just to add to the suspense (there were a total of five I bought).

So here’s the first one.  You might have to do a bit of sleuthing around this blog to find the clues.

• It is a Canadian company, based out of Winnipeg
• It was a stock I bought from my 2010 TFSA porfolio
• It had already turned into a corporation in 2010 and still kept a good dividend yield
• It pays $0.13 per share every month like clock work
• This works out to be about a 8.43% annual yield (how about ‘dem apples, regular ol’ TFSA?)
• It DID pay 11.3% annual yield, but it just got more expensive to hold in your portfolio, that’s all
• It increased its distribution amount by 4% in 2008
• The P/E (Price to Earnings Ratio) is 18.33 (which I don’t like because ideally you want it <15, but I do like the dividend it pays)
• The Price to Book Ratio is 1.98 (you want it less than or equal to 1.5)
• This company focuses on Aviation (provides airline service and medical air services to First Nation communities in Northern Manitoba and Nunavut to Winnepeg) and Manufacturing (it produces specialized tanks, pressure equipment, and precision metal parts in Western Canada and the US)

Alright, did you guess what it might be?

If you guessed Exchange Income Corporation, then you win the satisfaction of knowing your Canadian aviation and manufacturing industry!

I didn’t want to buy it because it seemed somewhat expensive (near it’s 52 week high, unfortunately like many other stocks out there), then changed my mind because of the lusty 8%+ annual yield.  I only bought 50 shares of it.  I like that it is a diversified company (has a focus on both aviation and manufacturing) and are growing and acquiring businesses (recently acquired HMY Airways in 2009), yet still are able to maintain the dividend yield.  I also like that the aviation part of the business seemingly focuses on a stable part of the aviation industry- transport of patients to and from remote communities to Winnipeg for access to health care (which is paid for by the federal or provincial government and our tax dollars I believe ).

Readers, do you own EIF.TO?  Do you find it as sexy as I do?   What have you put in your TFSA’s this year?

Stay tuned for next Wednesday (same Bat Time, same Bat Channel) for guess at my next TFSA portfolio holding.  And please, if you’re interested in this stock, please do your own diligence and research- as I’m in no way a financial planner or finance guru of any sort! So don’t be a lemming or get mad at me

Related posts:

1. youngandthrifty’s 2011 TFSA Holdings- Part IV
2. youngandthrifty’s 2011 TFSA Holdings Part Deux
3. My TFSA Portfolio

In the previous post I blabbered on about how amazing dividends are.  They really are amazing- once you start investing in them you can’t stop!  They’re like Pringles Chips.  You can’t have just one.

I didn’t realize their potential until recently, and since then, my portfolio has been lookin’ pretty fine.  I’ve recouped all of my losses since I started investing in the first place about 5 years ago (the losses are thanks to the dreaded “other investments” )(NB: the best way to learn how to invest is to do it and learn from your own experience!), and am well in the glorious green.

A few months ago, I calculated the dividend yields of all the dividend producing stocks I own.  Doing this reinforces me  NOT SELL prematurely because of the dividend yield I will get per year.  It switches my mentality from: “sell this thing and take profit” to “if it dips, then I’m picking up more”.  My goal is to be able to increase my positions on dividend yielding stock, so that I can not only reinvest it to build my portfolio further, but hopefully one day it can replace my income (or a large portion of it) and I can retire early at 35.

Wishful thinking, huh?

I wrote the % return per annum and the resultant amount in $ that I would get per year with the number of stocks I own.

Without further delay, here’s a list of my annual yield from dividends (and income trust distributions):

I hope to increase my positions on more dividend paying stocks and slowly increase my passive income this way. Of course, this will look a little different next year, when the Income Trusts (those with a .UN at the end) that I have in my TFSA account are going to be incorporated.

Note: The Income Trust distributions are NOT dividends- because these companies aren’t corporations- they are taxed different (and taxed  heavily) so try not to hold income trusts outside of TFSA or an RRSP or else you will be taxed to the nines.   After 2011. some of the income trust companies that I own will keep their yield, and some of the companies will have their yields slashed, but at least it will be tax efficient.

There you have it.  This list has changed slightly since I calculated it a few months ago, for example, I got rid of LUX because any dividends paid out from this is considered foreign income, hence it’s taxed at 100% my marginal rate= NOT tax efficient.

If you like dividend portfolio voyeurism (really, who doesn’t?) DividendLover.ca has a super detailed excel spreadsheet.

Readers, do you have any favourite dividend yielding equities you like?

Related posts:

1. Why and How to DRIP: Dividend Re-Investment Plans
2. Dividends… Explained!
3. RRSP holdings: part one

Do you like my camera skills?  I love the iPhone- its so easy- take a picture and send it to myself in an email and….voila! A picture for my blog is ready!  Anyway, I digress, we’re talking about dividends here.

So what are dividends?

They’re something magical.  They’re great. Win-win in terms of taxation. They’re tax efficient.

Dividends, according to Investopedia are profits from the company and they can be either reinvested into the company or paid out in the form of dividends:

“Dividends may be in the form of cash, stock or property. Most secure and stable companies offer dividends to their stockholders. Their share prices might not move much, but the dividend attempts to make up for this.”

I like the words “secure” and “stable”.  Usually only big time companies (corporations) offer dividends to their stockholders.  High growth companies reinvest their earnings into the company to make the company grow bigger and faster.  High growth companies’ share prices may move more.

Canadian Corporations Dividend Tax Credit

Canadian corporations that pay out dividends get a tax break, so you get one too.  In fact, the dividend income (which you have to report or else the tax man will be after you) that you get is tax efficient.  Dividend income from Canadian corporations are taxed at a lower rate than other forms of income.

You get a dividend tax credit (you’ll see the dividends paid out on your T5 slips) which you submit during tax season.  The formula is pretty complicated, but it pretty much sums up to you paying very little in dividend taxes.  The dividend tax credit came about because the Canadian government doesn’t want to tax you twice (it taxed the corporation already so it won’t tax you as much).

Canadian Dream Free at 45 explains the Canadian Dividend Tax Credit in Depth on his blog.

Also, sometimes you get a negative tax amount with Canadian dividends, and this can be used to reduce the taxes payable. Taxtips.ca explains in depth.

However, the Canadian government doesn’t get a hoot If you bought a foreign (e.g. US) corporation’s stock and it paid out dividends.  These dividends would be considered foreign and you won’t get a tax break.  They don’t care about taxing you twice.  You’ll pay tax on that dividend like you pay tax on a GIC (interest income) or other non-tax efficient sources of income.  Before you know it, that chunk of money will be whittled away to something much smaller.

So what do you need to look for in a dividend paying stock?

You want to look at the Dividend Yield.  Let’s take FTS.TO for example (it’s a gas and electricity utility company) .  It’s current dividend yield is 3.46. So if you were to buy it at its current price of $32.33, the percentage back you would get in dividends is 3.46%.  The current dividend is $0.28 quarterly.  Multiple that by four, you get $1.12.  $1.12/$32.33= 3.46%.

You can see that the dividends paid out for the past year is $1.10 ($0.28 Aug, May, Feb and $0.26 last November).

That’s another good sign.  When they have CONSISTENTLY increased their dividends over a long period of time, you know the corporation you’re investing in a stable company and your investment shouldn’t (but you never know, I suppose) hurt your portfolio.

FTS.TO went from $0.16 a share in 2006 to $0.28 a share!  That’s a 75% increase in dividends in less than five years.

Likewise goes for a company who suddenly decreases their dividends.  You know you’re in hot water if a company decreases their dividends (namely MFC.TO which I also own).  Investors will start jumping ship.

Readers, this is a very basic explanation of dividends, is there anything else I might be missing that you want to add? What portion of your portfolio do you include Canadian dividend paying corporations?

Related posts:

1. youngandthrifty’s Dividend Yields
2. Flow Through Shares…Explained!
3. RRSP Part two: what to keep outside of that RRSP

Now we want to think OUTSIDE the box (aka RRSP).

What should we keep outside of the RRSP or Tax Deferred Shelter?

Well, after you maximize your RRSP’s and TFSA, then you can keep investments in the “spillage”

Basically you want investments that are the least “taxing” to you, to keep outside of an RRSP.

Say HELLS NO if you can help it, to:

• bonds
• GIC’s
• money market funds
• foreign equities/ stocks that have robust dividends
• basically anything that is taxed at 100% your marginal rate to you

Say YES PLEASE, to:

• Canadian stocks with dividends (these are actually given PREFERENTIAL tax treatment- the government is kind to us when we are kind to our Canadian corporations)
• Any stocks (capital gains are given good tax treatment)
• non-dividend foreign stocks (e.g. stocks on the NYSE that don’t give out dividends)
• equity type mutual funds
• risky investments (you definitely don’t want to keep these in an RRSP because once you lose that contribution room, you’re screwed)

It may be nice to receive $100 interest from a GIC that you have maturing.  But if you don’t keep it inside some sort of tax shelter (RRSP or TFSA), then that $100 is really $70 if you are taxed at 30% of your income (marginal rate).

On the other hand, if you have $100 investment gain from a stock, then that is considered a capital gain, and only 50% of that amount is subject to tax.  So $50 would be subject to the 30% tax, so for that $100 you get to see $85 of it, not $70.

I personally was keeping everything and anything in my RRSP intially (except for GIC’s!!) and after I did some researching I realised that I should be more “tax efficient”.  So now I put GIC’s and bond index funds in my RRSP, to shake things up a bit.

What are you keeping in and out of your RRSP/TFSA tax shelters?

Related posts:

1. RRSP holdings: part one
2. RRSP versus TFSA: Head to Head Comparison
3. RRSP’s: aka Registered Retirement Savings Plans:

So what should one hold in the RRSP?  I have heard some people say that an RRSP should be “safe” and should have more low risk investments held in them (e.g. think GIC’s), some people say more growth-geared investments because it grows tax deferred.

From what I have learned, I would say that looking at how investments are taxed would be a good starting point.

Let’s look at GIC’s (guaranteed income certificates):  the rate that the big banks are offering now is pretty abysmal (what, 1% for a 1 year term, and 3% for a 5 year term?  Does that even cover inflation?).  But when you buy them outside of an RRSP, interest income (as the income from GIC’s or other savings plans is coined) is taxed at 100% your taxable rate.  So that means, if you are taxed at a rate of 30% of your regular income (check out this website for great information on our marginal tax rates and other good stuff http://www.taxtips.ca/), then you get 30% off your GIC money hacked off too, if it weren’t in an RRSP.

So suddenly that 1% becomes 0.7% after taxes are done with them, AND if you really think about it, if it weren’t in an RRSP you are using your after tax income dollars to pay for your GIC, so it’s even less!

Getting depressed yet?  It’s alright, just put investments like that in an RRSP or TFSA.

The best things to put in your RRSP “grocery basket” should be stuff that is taxed at 100% of your tax rate.

Those investments are: GIC’s, money market funds, bonds, and savings in cash to name a few.

AND one that I realized AFTER I filled up all my contribution room with Canadian investments thank-you-very-much, are high paying foreign dividends.  I thought ka-ching! when I saw that Johnson and Johnson was paying out a 44 cent per share dividend, but if you don’t keep it in a tax protected RRSP, that dividend gets hacked.  Learn from my mistakes, put US high paying dividend investments in an RRSP if you are planning to get any.

Related posts:

1. RRSP Part two: what to keep outside of that RRSP
2. RRSP’s: aka Registered Retirement Savings Plans:
3. youngandthrifty’s 2011 TFSA Holdings Part Deux