Dividend Canadian stocks are fascinating. Many of them operate in small niches and pay handsome dividends. Some even trade in U.S. dollar on an American market (either the NYSE or the NASDAQ) and some others pay a dividend in USD. Should you invest in a Canadian stock in USD? What is the advantage of having US dollars paid by a Canadian company? Are there withholding taxes on USD dividends?

In this article, we’ll answer all those questions. We’ll also cover Canadian companies paying a dividend in USD for my Canadian fellows that want to enjoy a sunny retirement down south without having to worry about currency fluctuations.

One question that keeps coming up since the creation of Dividend Stocks Rock in 2013 is:

“As a Canadian, should I invest in the U.S. stock market?”

This is usually followed by…

“I’m asking because the currency rate isn’t good right now”

Is it really?

Let’s look at the Canadian Dollar vs. the US dollar since the 70’s:

 

So, what we see is that we used to trade close to par in the 70’s (remember, it wasn’t a glorious decade for our southern neighbors). Then, it’s a rollercoaster ride going between $0.65 to $1.05 depending on the decade. Now, let me work some magic with this graph and present another perspective:

Over the past 50 years, the dollar moved by 26%. If you put that back in annualized return, we are talking about the equivalent of an “expensive” ETF fee (0.456). The largest movement went from 2002 to 2007 (remember the oil boom with oil income trusts?) where our dollar surged by 71%. The difference between the bottom in 2002 and today is a 16% upside fluctuation.

Here’s the range of risk regarding CAD vs USD: over a short period of time, one investment in “bad” currency could make you lose a lot (71% between 2002 and 2007). However, if your investment horizon is over five years (seriously, if it’s 5 years or less, stop investing in equities right now), chances are the impact of currency fluctuations will be less than 1% per year.

Right now, we are not close to a historical high or a historical low. Therefore, your risk of losing massively in investing in USD for Canadians or in CAD for Americans isn’t that important all things considered.

However, the risk of not investing in those unique opportunities for each country is great. Americans, you won’t find better banks, telcos, pipelines and utilities outside of Canada. Canadians, you will not find better exposure to international markets, new technology and the world’s most popular brands outside of the U.S.

If you can combine both markets to your advantage, you will build the most powerful (and stable) dividend growth portfolio. You’ll be well on your way to achieving your retirement dreams.

I’ve discussed at length my interest in U.S. dividend growers. I’m pretty sure I’ve convinced most of my fellow Canadians to consider U.S. exposure in their portfolios. However, I haven’t fully covered the advantage for Americans to invest in Canadian Stocks.

Since we are talking about currencies, I’ll cover three topics in this newsletter:

1. Canadian dividend stocks trading on U.S. markets for Americans to benefit from our best sectors.
2. Canadian dividend stocks paying dividends in USD for Canadians to retire in Florida or Arizona.
3. Canadian Depositary Receipts (CDRs) for Canadians to obtain a currency hedge and buy US stocks at a lower price.

Canadian Dividend Stocks trading on the NYSE

Good news, the list of Canadian dividend stocks trading on U.S. markets isn’t exhaustive. I’ve compiled a complete list to the best of my knowledge.

You can download the list here.

Fortunately for you, there are several great options on this short list.

Canadian Banks (RY, TD, BMO, CM, BNS): Canadian banks are highly regulated, but also highly protected. They are comfortably doing business in a small oligopoly. If you haven’t considered Canadian banks yet, now is your chance. While most stocks trade today at very high PE ratios (even after the small drop we are having now), the big 5 are trading at 11-12 times their earnings. RY and TD are my favorite from this group (more on National Bank later). A special mention to Brookfield Assets Management (BAM) which is an asset manager and not a bank. Still, this is a company you should consider. You can view our complete Canadian banks ranking.

Life insurance companies (MFC, SLF): Canadian Life Insurance companies could be interesting now that interest rates appear to be increasing. My favorite is Great-West Lifeco which is not part of this list (unfortunately). SLF would be my pick instead.

Telecoms (BCE, TU, RCI, SJR): Like Canadian Banks, telecoms operate in a small oligopoly where 90% of the wireless market is controlled by BCE, TU and RCI. BCE and TU are long-time dividend growers. The former will offer you a stable yield while the latter will offer you a great combination of growth and yield.

Utilities (FTS, AQN, BEP, BIP, TA): If you look them up at DSR you will notice they all have strong ratings, but TA. AQN, BEP and BIP also pay their dividends in USD. Therefore, there is no reason to not consider those great dividend growers!

Energy (ENB, CNQ, TRP, SU, IMO, PBA, CPG, ERF, OVV): While there is a wide range of choices in this category, I would cut the selection to only include dividend growers. ENB and TRP are probably the most reliable pipelines in North America while CNQ and IMO (which is partially owned by XOM) are two other great dividend growers. They have proven (especially in 2020), that they can weather any storms and keep their promises to shareholders.

Industrials (TFII, CNI, CP, STN, WCN, TRI): This is clearly a widely diversified group, but they should be considered, nonetheless. CNI and CP are among the strongest railroad companies in North America. WCN pays a small yield and is a very stable business. Thomson Reuters shows 28 years of consecutive dividend increases. TFI International is one of the fastest growing trucking companies in North America.

Materials (FNV, NTR, GOLD, AEM, WPM, PAAS, MX, TECK, CCJ): You know I’m not a big fan of materials, but FNV is in another class. This is a rare gold-related company showing several years with dividend increases. Nutrien is also an interesting pick if the demand for potash remains strong.

Various (MGA and OTEX): Magna International (MGA) is an amazing company. You can surf on the car industry along with the EV trend through Magna without having to take the risk of another automotive crash. The company is one of the largest auto parts sellers in the world. It’s a cash flow machine! As for Open Text, this is a SAAS business with over 100,000 customers around the world. However, I must admit that you will have better choices on the US market if you are looking for a solid tech stock!

If you are American, I’d say that investing in Canadian banks, telecoms and utilities would add a lot of value to your portfolio. We have many choices in the energy & materials sectors as well, but I’m not a fan of those sectors.

What about pink sheets?

You will notice in the stock screener that we have a few pink sheets. Pink sheets are listings for stocks that trade over the counter (OTC) rather than on a major U.S. stock exchange. They are usually companies that can’t meet the requirements for listings on the major markets. They usually have a “bad reputation” as many of them are penny stocks with limited liquidity. As a dividend investor, this is not exactly what you want to add to your portfolio.

However, you will also find amazing Canadian stocks that are listed as pink sheets such as National Bank (NTIOF), Emera (EMRAF), Power Corporation (PWCDF) and Alimentation Couche-Tard (ANCTF). Those are far from being penny stocks. Emera is the smallest company among this list with a market cap over $15B. While there is less volume for those companies, you can add those shares to your portfolio if you have a long-term horizon. Feel free to read our stock analyses on the Canadian side if you have doubt about a pink sheet stock.

Canadian Dividend Stocks Paying USD dividends

Some Canadian companies have decided to pay their dividend in USD. This decision usually comes after a business analysis where the company shows most of their revenues are made in the United States. By paying their dividend in the same currency as they generate their revenues in, they reduce the risk of currency fluctuation. We have a recent example with TFI International (TFII) where they changed their CAD dividend to USD after the integration of a massive acquisition in the U.S. (UPS freight was purchased for $800M).

Is there a tax implication?

In most cases, dividends paid in U.S. dollars by Canadian companies are eligible for the dividend tax credit (source).  It’s always a good practice to verify this information in the dividend section of the company’s investors’ website. The dividend may also be deposited in your account automatically in CAD. Again, it depends on the company. Those are questions you can ask your broker to ensure you receive the right dividend in the right currency!

What’s the advantage?

In general, the advantage of a USD dividend is more for the company generating most of their revenues in USD as explained earlier. For investors, it could be a source of headaches or frustrations (you don’t want your broker making a sweet 2% conversion rate fee on your dividend, right?). However, if you plan a vacation or retirement in the U.S., having Canadian stocks paying their dividend in Uncle Sam’s dollar is a natural hedge against currency fluctuation. You can build a part of your portfolio with those Canadian stocks along with other US stocks and you’ll be set to never have to worry about converting your money “at a bad rate” in the future.

The list of Canadian stocks trading on the NYSE counts 63 companies and the Canadian stocks paying USD dividends is relatively small (35companies), but you will find some common names.

You can download the list here.

Canoe EIT Income Fund is a Canadian closed-end investment trust. The investment objective of the Fund is to maximize monthly distributions relative to risk and maximize net asset value while maintaining and expanding a diversified portfolio. In other words, EIT has been created to take your money, manage it, and distribute juicy monthly dividends to help you manage your retirement budget.

What Canoe Income Fund looks like

The Canadian fund includes 54.5% (+8.5% vs last year) Canadian equity stocks, 39.4% (+2.4%) U.S. stocks, 0% (-10%!) cash and 6% (flat) international equity. There are no bonds or other types of fixed income securities. Despite having around 50% of its assets invested in Canadian firms, its sector breakdown is heavily concentrated into financials, energy, and materials (56.2%).

 

Source: EIT website

*The top 25 equity holdings make up 78.1% of the fund.

They have an impressive diversification of stocks from low yield to high yield with various safe stocks and other quite speculative securities. As you might correctly assume the fund has 30% (down from 35.8% last time we reviewed it in 2021) of its assets invested in energy and the basic materials sectors, and I am not a fan of this type of portfolio. However, it explains why it has been performing well in the past two years (more on that later).

Another interesting point is the amount of turnover in the fund when we compare their top holdings from July 2021. I have highlighted (in green) 8 positions out of 25 (32%) that are not in the top 25 this year.

*The top 25 equity holdings make up 77.4% of the fund in 2021.

But my opinion does not really matter if the fund helps you retire happily. Let’s look at what does really matter though and that is how the fund’s money has been managed over time and how much you profit (or not) from the management team led by Rob Taylor, CPA, CA, CFA (yes, he needs 2 business cards to include all his titles!).

Performance & Distributions

From their website, we can see that EIT has outperformed the TSX on a consistent basis (which was not the case with 2020 numbers). Their focus on the energy and basic materials sectors clearly paid off over the past 24 months.

However, I do not like that they only use the TSX as their benchmark and ignore the S&P 500. With close to 40% of their portfolio invested in the U.S. and 6% in international markets, it seems only fair to include U.S. and international components to their benchmark.

Just for fun, I ran the calculations using a portfolio with 54.5% XIU.TO, 39.4% SPY and 6.1% XEF.TO (for international equity) for the past 5 years and 3 years. Results include dividends and are as of 7/31/2022 to match their website.

The portfolio with 54.5% XIU.TO, 39.4% SPY and 6.1% XEF.TO shows a 5-year return 63.13% or 10.28% annualized return. This is much lower than the Canoe Income fund.

This is quite interesting as our conclusion in 2021 and 2020 was not the same. The first two times we analyzed the fund, it had underperformed the index portfolios we created. This time, it is quite the opposite. You can see that change occurred around mid-2021 where Canoe started to surge while indexes reached a plateau and eventually decreased in 2022.

The idea of having a high yield investment (EIT.UN.TO pays 10% yield at the time of writing) where distributions are paid monthly is quite interesting. If you reinvest the distribution, you could beat the market, which is quite impressive! Strangely enough, EIT.UN.TO returns are now quite like my personal portfolio.

The lesson here is that conclusions and returns can vary from one year to another. We will review Canoe again next year. The Canoe fund could be an interesting way to generate a high income from your investments. However, if you cash this distribution, make sure you realize two things:

#1 Your capital will not likely grow over time

#2 Your dividend will not likely grow over time

Final Thoughts

Canoe EIT income fund is not the worst investment in the world. In fact, it generated decent returns considering their dividend. While recent performance on the market is impressive, the fund is not perfect. First, do not avoid fluctuations when the market is shaky. If you looked at your portfolio value during corrections, Canoe did not save you from headaches.

What if you could beat the Canadian market return by selecting ten stocks each year? The Dogs of the TSX strategy gets its name from the Dogs of the Dow, an investing technique well-known in the U.S. for selecting the “dogs” (paying a higher dividend yield) of an index.

The Dogs of the TSX, or Beat the TSX (BTSX) strategy was developed by a professor named David Stanley where he suggested that by selecting the highest dividend yielder of the TSX each year, you could beat the index.

If you are tired of losing money on bad stocks, this strategy could help you quickly build a solid core portfolio.

The Dogs of the TSX in a nutshell

One of the BTSX method’s main advantages is its easy implementation. You can start trading with four simple steps:

#1 List the TSX 60 index by dividends. The TSX 60 is the index of the 60 largest Canadian companies. Most of them are blue-chips like banks or telecoms and pay a dividend.

#2 Select the top 10 yielding stocks from the TSX 60. The ten most generous stocks are called the dogs of the TSX. As they offer the largest yields, they technically haven’t performed the year before. Therefore, their yield is higher, and you buy them at a “relatively” low price.

#3 Buy the top 10 yielding stocks in equal weight. Boom! You build your core portfolio for the year! The strategy is based on buying the dogs in January.

#4 Each January, review the new Dogs of the TSX and trade accordingly. Each year, you must do steps from #1 to #3 to ensure you always have the highest Canadian yield stocks. 

The Dogs of the TSX Portfolio 2022

Here’s the list of the top 10 yielding stocks from the TSX 60 for this year.

All you have to do is to invest an equal amount of money in each dividend stock to build your portfolio.

30 years of outperformance

Matt from Dividend Strategy is doing a monk’s work to keep track of this strategy. Shockingly, The Dogs of the TSX has outperformed the market for 30+ years!

Source and more graphs at BTSX portfolio by Dividend Strategy

Why the BTSX works so well?

I was a bit skeptical when I heard of this strategy at first. It’s unlikely that such a simple strategy would outperform the market consistently. I’ve done my research to understand the success rate behind the BTSX strategy.

#1 Buying blue-chips quality stock. The TSX 60 refers to the 60 largest stocks in Canada. Chances are, those companies will be around for a while.

#2 Canadian stocks have a great history of paying and increasing dividends. There are many dividend aristocrats among the TSX 60. Dividend growers tend to outperform the market over a long period of time.

#3 Buy low, sell high. The Dogs of the TSX is based on a classic investment principle: buy when stocks are low and sell them at a higher price. By rotating your portfolio each year with the new “dogs”, you ensure to buy the best stocks at the lowest price while selling those with a great return over the past 12 months.

#4 It’s relatively easy to beat the Canadian market. The fact that the BTSX is working isn’t necessarily an achievement. The Canadian market is heavily concentrated in two sectors: Financials and Energy. By investing in other sectors, you can easily beat the TSX.

Why I don’t use the Dogs of the TSX strategy

Investors can beat the TSX with an easy-to-use and straightforward strategy. Why am I NOT using the Dogs of the TSX for my portfolio?

#1 Know what you hold and why you hold it. It is one of the foundations of my investment model. I prefer to research and understand the company’s business model before I add a stock to my portfolio. Buying stocks based on an index and a dividend yield seem too simplistic. It won’t hold very well during market crashes.

#2 Sector concentration. The BTSX forces you to buy only ten stocks based on the dividend yield regardless of the sector. The Dogs of the TSX 2022 shows 30% of financial companies and 30% of energy stocks. With 2/3 of your money invested in two industries, your portfolio is subject to intense volatility.

#3 Transaction costs and taxes. Rotating your stocks each year could trigger several transactions and prevent you from deferring tax on capital gains. This will have a severe impact on your returns in a non-registered account. Investing in the Dogs of the TSX in a RRSP or a TFSA account is best.

#4 I already beat the TSX. I’ve been a dividend growth investor since 2010. My years of experience in the financial industry and research helped me build a proven investing strategy. My results are not only better than the TSX, but they are also better than the BTSX strategy. Therefore, I don’t see any reasons to change something that already works.

An exclusive list of dividend growers with more potential…

Moose Markets presents the Canadian Dividend Rock Stars list: a selection of Canadian companies showing income and growth. You guessed it; we prefer a combination of dividend growth and dividend yield. The Canadian Rock Stars List is a selection of the safest dividend stocks in Canada.

GET THE LIST NOW