Sunday, December 30, 2007

The Secret to Tax-Free Living

After reading this article in the Globe Investor Magazine, it's no wonder why Canadian investors like Derek Foster like dividend paying stocks so much...

The secret to tax-free living
How to leverage the dividend tax break

Globe Investor Magazine, Nov. 21, 2007

THAT OLD SAW ABOUT death and taxes being inevitable is only half true: If you live in Canada, you can earn a tidy five-figure income without paying any tax. And you won't have to open an offshore bank account or work a single job under the table, because it's perfectly legal in the eyes of the Canada Revenue Agency.

How is this possible? Dividends.

Though the CRA is greedy when taxing employment and interest income, it's uncharacteristically generous when it comes to dividends of publicly-traded Canadian corporations. By taking advantage of the dividend tax credit, an investor with a sizable nest egg can live off the dividend income without sending a penny to Ottawa. Here's how.

Suppose you've worked hard, saved diligently and have a million dollars. You decide to invest the money in a portfolio of dividend-paying Canadian stocks that yields 4.5%. Let's further assume the $45,000 in dividends that rolls in every year is your sole source of income. Now, let's examine what happens to those dividends at tax time. The first thing the CRA does is apply a "gross up" to the dividends. Specifically, it multiplies the $45,000 by 1.45, for a total of $65,250. This is your taxable income. So far, things look pretty bad, right? The CRA is making it appear you earned more money than you actually did.

Including the basic personal exemption, your federal tax owing would be about $10,550. But-here's the key-because you're earning dividend income, you qualify for the generous dividend tax credit, which equals the grossed-up amount multiplied by 18.97%, or $12,375. Now for the best part: Subtract $12,375 from $10,550 and what do you get? That's right, a negative number! Translation: You don't owe any tax to the CRA. And because provinces offer their own dividend tax credits, depending on where you live you might not have to pay any provincial tax either.

In Ontario, for example, it's possible for an individual to earn up to $48,000 in dividends without forking over any federal or provincial tax, apart from a $600 Ontario health premium. In British Columbia dividend tax credits, an investor can earn up to $66,000 essentially tax-free, according to Michael Smith, an analyst with National Bank Financial. And the tax-free thresholds are set to rise over the next few years as provinces boost their dividend tax credits.

Though the tax-free dividend strategy is powerful, few people know about it, Smith says. "I've shown it to at least a dozen people in the financial industry-portfolio managers, investment bankers, analysts. Basically, they all say, 'Wow!'"

It's especially appropriate for retirees with significant savings and no other sources of income.
Now, let's look at what would happen if, instead of earning dividend income, you invested the $1 million in a bond or guaranteed investment certificate that yields 4.5%. Because interest is taxed at full marginal rates, if you live in Ontario you'd end up paying $9,050 in tax on $45,000 of income.

From a tax perspective, dividends are the clear winner. But dividends are at--tractive for another reason: Many companies-including banks, insurers, pipelines and utilities-raise their payouts once a year or more. Manulife Financial, for example, has hiked its dividend at an annual rate of about 25% over the past five years.

A bond or GIC, on the other hand, pays a fixed amount of interest. If you can stomach some volatility in the stock market and have a long-term investing horizon, dividends are the better choice, in my books.

That's why, for my own portfolio, I buy nothing but dividend stocks with rising payouts.

JOHN HEINZL is an investing reporter and columnist with The Globe and Mail's Report on Business.
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Saturday, December 29, 2007

2008 Resolutions

As a follow-up to the previous post of my biggest regrets of 2007, I hope to learn from those mistakes as I set my goals / resolutions for the upcoming year. So without further adieu, here are my goals for 2008 in no particular order:

  • Take advantage of the financial stock slump to pick up some dividend-paying Canadian bank stocks to increase my dividend income.

  • Set stop-losses and stick to them no matter what happens.

  • Stay away from companies I don't understand or even pretend to understand (i.e. the entire biotech industry).

  • Finally establish a plan for my RRSP and invest the cash that is currently just sitting there.

  • Let my winners fly until the trend is broken.

  • Take advantage of any extra cash in my portfolio for quick wins.

  • Earn higher capital gains than in 2007.

  • Stick with bigger, well-known names for a minimum of 80% of my stock portfolio.

  • Take advantage of season trends in certain stocks / sectors.

  • Start buying quality stocks if and when I hear the mass media and regular folks on the bus discussing the collapse of the market.

  • Reach a net worth of $300k in liquid assets (cash / stocks / mutual funds + RRSP).

  • Get a promotion at work.

  • Exercise at least 30 minutes a day, 3 times a week.

  • Find Miss Right For Me (probably a long shot, but I'll throw it in there anyways).

Thursday, December 27, 2007

Biggest Regrets of 2007

With 2007 quickly coming to an end, I thought it would be appropriate to reflect on my investment activities for the year and come up with a list of my biggest regrets of the year:

  • Thinking that I was smarter than the market.
    The most explicit example of this would be Timminco (TIM-T). I had become aware of this stock when it was trading in the three to four dollar range. At that point, I had done some preliminary research on the company and determined that it was too expensive. Perhaps more importantly, in retrospect, is the fact that I had also read that silicon (the main future driver for this company) would soon be replaced by other elements in newer solar power technologies. With that in mind, I thought this stock was over-hyped. TIM ended the day at $21.91. Enough said.

  • Not investing in stocks in clear uptrends like I had in 2006.
    This cost me dearly by missing out on some impressive gains this year.

  • Missing my chance to re-enter / add to positions during the August meltdown.
    Between being pre-occupied with my new job and not having the guts to go all-in when the casino is burning down, prevented me from making over forty percent in several of my favourite stocks.

  • Not letting my winners fly until the trend is broken.
    Cashing in my profits too early resulted in not getting the full benefits of the rise of stocks like Thompson Creek (TCM-T), Hanfeng (HF-T), Migao (MGO-T), Oilexco (OIL-T), and Silvercorp (SVM-T) amongst others.

  • Not cutting my losses early enough.
    Call it my abundant optimistic outlook on life or stupidity, but by not having an exit strategy when things go wrong resulted in my losses killing most of my gains this year. Thanks for nothing Nova Uranium (NUC-X) and Liponex (LPX-T).

  • Not taking advantage of seasonal trends like I had earlier noted to myself.

My next post will be on my goals / resolutions for 2008. Stay tuned!

Monday, December 3, 2007

What happens when someone makes a mistake

and a BIG mistake at that?

Well, in the case of Thompson Creek's trading activity today, the stock gets halted.

The following issues have been halted by Market Regulation Services (RS):
Issuer Name: Thompson Creek Metals
TSX Ticker Symbol: TCM
Time of Halt: 12:59 EST
Reason for Halt: To clear erroneous orders and to restore fair and orderly market
For further information: Market Regulation Services Inc., (416) 646-7299

Trading resumes in:
Issuer Name: Thompson Creek Metals Company Inc.
TSX Ticker Symbol: TCM
Resumption Time: 13:12 EST
For further information: Market Regulation Services Inc., (416) 646-7299

Here's the intraday chart to provide some insight as to what happened:

and the 1 year chart just for kicks:

Apparently, orders were actually undone according to at least one Stockhouse Bullboard poster so I question the accuracy of these charts in demonstrating today's activities. But these charts may cause trading software to trigger interesting recommendations and transactions in the days to come... let's see how it plays out.

And on a side note: Wouldn't it be nice to have an undo button on your trading platform?