If you’ve been following my blog, you might have noticed I like investing in Canadian stocks. By investing in home grown stocks it not only strengthens our economy, but we get a great tax break on the dividends as well. The only problem with Canadian stocks is that our markets lack strong companies in certain sectors like consumer goods, pharmaceuticals, and technology. Having a balanced portfolio can help lighten the blow when market uncertainty hits and having a diverse selection of dividend paying companies will balance your passive income just in case a certain sector might be hit hard for a few quarters and dividend increases are postponed.
So why U.S. stocks all of a sudden? Well in case you haven’t noticed, as I’m writing this, the loonie is sitting at 99.73 cents and it looks very likely that it will go beyond parity allowing more bang for our Canadian buck. If you buy US stocks and we go below parity like majority of the time, the dividends paid in US dollars will be paid at a premium and your yield increases from the currency exchange AND dividend increases. The only catch is you have to hold the shares in a registered account like an RRSP trading account, otherwise you will have to pay a withholding tax on the dividends paid to you. You may also have to do a wash trade when buying U.S. stocks , depending on which discount brokerage you use. A wash trade allows you to avoid paying currency conversion fees by calling the brokerage the day you place the trade, and they will convert your Canadian money from your account to a U.S. money market fund, then they will sell your U.S. market fund to buy your U.S. shares. It might seem like a lot of work, but it’s better than paying those fees. RBC has no currency fees in their RRSP trading accounts, and hopefully TD gets the head out of their … and does the same.
I really like the consumer goods sector. We as consumers are brainwashed to buy, buy, buy and that allows companies to grow, grow, grow. People always need to eat, majority of us like to keep clean and clean our homes, and we all like to buy new clothes and gadgets. When I’m investing, I want to keep my money in companies that will be around when I retire and hopefully when my future children retire. By investing in companies that make food, cleaning products and personal care products, I know they will be in business for many years and that there will always be a need for their products. When some of these companies have increased their dividends for decades, It’s a no brainer to hit the buy button when they are reasonably priced.
I own shares in KMB and would like to expand into more dividend aristocrats like JNJ, MCD and many other great consumer companies from the states.
Pharmaceuticals on the other hand can be a little tricky. Patents for drugs in the US last 20 years minus the clinical trials, so once the patent expires, it’s free game for generic drug manufactures which drives down the price, thus driving down the profits. Lawsuits can also hurt profits for pharmaceutical companies as well. If someone pops a pill and there was no warning on the label to unplug the toaster before using it as a water flotation device, then hello settlement! I own shares from one Pharma company from the states, and it will be the only one for a long time.
Technology stocks can be hit or miss. Today’s Apple can become tomorrow’s Beta Max, although that’s highly unlikely. A lot of big name technology stocks usually don’t pay a dividend. They like to keep reinvesting the profits, and buy back shares to increase stock price to keep investors happy. Most tech products are cyclical meaning their product demand can change month to month. An earthquake in Japan can drive the price up on computer memory one month, and a memory factory opening up in India drives it back down two months later. I don’t own any tech stocks, but once some of the bigger companies start paying dividends, I’ll be on them like a fat kid on a Smarty (or M&M for my U.S. readers!)
Do any of you own US stocks? Do you see this as a good time to start… stocking up on them?