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Why US Investors Overlook Canadian Dividend Payers at Their Own Risk


Published October 5th, 2016

This is a guest contribution by Ryan Modesto.  Ryan Modesto is the Managing Partner at 5i Research, a conflict-free investment research provider, covering small to mid-cap Canadian equities.

The US is a big, prosperous place so it is easy to understand how a US investor may overlook their chilly friends to the North when constructing a dividend portfolio.

While there are plenty of investment options in the US, Canada offers some unique benefits that may be worth considering from a US perspective:

Canada Is on ‘Sale’!

The recent decline in the Canadian dollar means your US dollars can go just a bit further when buying Canadian securities. Stocks that would have been about the same cost on a dollar for dollar basis just two years ago are now essentially 30% cheaper today.

This allows a US investor to take advantage of some high yielders and build a strong cash flow stream north of the border. Yes, eventually these dividends would need to be repatriated to US dollars but adding to Canadian dividend names over the long term can have a powerful compounding impact while adding potential torque to a portfolio if the exchange rate moves favorably.

Currency Diversification can Add Value

Just like an investor should diversify across geographies, assets and industries, studies have shown that there is value in diversifying across currencies.

Canada makes an interesting case to US investors as the currency is a bit of a natural hedge to the US markets. Due to the high materials exposure that Canadian markets hold, whenever there is a ‘risk-off’ trade that sends US markets down, money often flows into materials and precious metals. This has the impact of lifting Canadian markets and in turn the Canadian currency.

Holding a bit of funds in Canadian currency can go a long way in smoothing out the ups and downs of the US markets and helping an investor withstand a market drawdown. This diversification play can also provide a stream of cash flows with which the investor can put to work wherever they wish.

Canada has some attractive Dividend Reinvestment Plans

Canadians love their dividends but we really love our dividend reinvestment plans (DRIPS). These are plans where dividends are automatically invested in the shares of the stock and oftentimes at discounts up to 5%! The cherry on the top here is that DRIPs have no additional transaction costs. So if an investor finds a name they like for the long-term, they can continue to add to it without paying transaction fees every time they average into it.

Note: We have included a list of DRIP stocks that may be worth consideration at the end of this article.

Oligopolies Make for Great Dividend Vehicles

Due to the large land mass and smaller population of Canada, oligopolies are not an overly unusual phenomenon and these industries also make great dividend payers. Three blue-chip industries that have very little in the way of competition are Financials (Banks), Telecommunications, and Indus trials (Railroads).

The Canadian banks offer investors a yield in the 4% range while being large and liquid international companies that exited the 2008 financial crisis as some of the strongest. Canadian citizens and businesses largely only have five banking options, helping to provide a base level of support/demand to these institutions.

Note:  You can see Sure Dividend’s highest ranking 2 Canadian banks analyzed here and here.

The telecommunications industry is another great example of an oligopoly in Canada. Telus (~4.25% yield), Rogers (~3.45% yield), BCE Inc (~4.5% yield), and Shaw Communications (~4.4% yield) cover about 85% of the Canadian market. Canadians are truly at the mercy of these names with very little in options regardless of price increases or customer service. While this can be bad for customer satisfaction and affordability, it can be great for company margins and sustainable dividends.

Railroads really only offer two options in the form of CN Rail and CP Rail. While these are not necessarily high dividend yielders, they do have a good dividend growth track record with CN Rail boasting a 5-year dividend growth track record of 18.3% and CP Rail at 5.77%. We also have a list of other Canadian stocks with a good dividend growth record over at 5i Research.

Foreign Tax Friendly

Canada and the US have tax treaties in place where if Canadian dividend names are held in an IRA or 401K, the withholding tax can be avoided. This helps to alleviate a lot of the headaches an investor would face when receiving Canadian dividends. The biggest downside here is that this may take up contribution space from other, less tax efficient investments.

With plenty of reasons to own Canadian dividend names in a portfolio the final case to be made is simply that of having a larger investment universe to choose from. Canada is host to some great companies and great dividend payers and ignoring them just because they are north of the border means an investor is missing out on some potentially great investment opportunities. So go get that double-double from ‘Timmies’ and start researching those Canadian dividend names, eh!

TIm Hortons Coffee

Note:  this is not a recommendation to take any investment action (or to drink a particular type of coffee). Please perform your own due diligence (and coffee tasting) before making any investment (or beverage) decisions. 

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Visit 5i Research for more conflict-free Canadian investment ideas.


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