Dividends, Glorious Dividends

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Compound interest and time are either your two best friends or your two worst enemies, according to my husband’s late father. In the case of Dividend Re-Investment Plans (or DRIPs) they are definitely your friends. (The situation where it is your enemy would be debt, like the ever evil credit card debt. Avoid paying interest on credit cards at all costs).

The stocks I like to buy pay cash dividends every quarter or every month. I get a nice boost in my brokerage account and I can use that money to buy more stocks. I can choose to have it paid to me as shares in the companies by filling out a dividend reinvestment form. The only downside of doing this through my brokerage is that I only get new shares if I own enough in a company whereby the dividend amount is equal to or greater than the share price. There is the additional benefit of a 5% or so discount in the cost of a share. My dividends will grow nicely over time this way.

Real stock keeners buy share certificates in street form – i.e. those old style paper certificates. By doing this and registering with a company’s transfer agent, companies will issue them fractional shares. I don’t do this, I find it a bit of a pain in the neck. These folks tend to need to have binders to track all of their dividends so that they can do their calculations for tax purposes. That’s just too burdensome for me, despite the inherent efficiencies and ability to buy stocks at discount, and I really like discounts. I’ll quite happily stick to the “synthetic DRIP” offered by my online broker. It’s quick and easy, and I end up with a bit of cash growing in my account that I can redeploy into stock purchases.

The theory with all of this is that at some point my dividends will grow to be enough for me to live off and I won’t need to sell the shares to pay my expenses. Having it all compound is a great way to help me get there. With current Canadian tax laws, dividends from Canadian companies are taxed quite favourably, better than income or interest.

US stocks have a bit of a challenge in that they have a withholding tax applied to them by the US government and as far as I know, there is no way to get credit for those taxes. The one way to avoid it is to hold US shares in an RRSP account as there is a tax treaty and no taxes are subtracted. US stocks held in a TFSA still have the tax hit. There aren’t a lot of US stocks that offer a DRIP plan through my brokerage, just the biggies like Johnson & Johnson and I don’t own enough of that one where my dividend is large enough to buy a share in the company.

I own a number of dividend-paying shares that are traded on the New York exchange but are not American stocks and don’t have the withholding tax like Glaxo, Unilever, Seaspan, Vodafone, and Pfizer. The dividends are received as cash and are taxed as foreign income at year end where they are outside of an RRSP. It’s a bit of a dilemma as the Canadian stocks get better tax treatment, but it’s also important to be well-diversified and that means buying stock in companies outside of Canada.

 

Michelle

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