[Steve]

I am looking at what to invest in for my TFSA, and I am trying to set it up with a decent yield. So far the holdings are companies with high dividend yields.

I am looking into adding Income Trusts to the mix, but was wondering what people's thoughts are with regards as to if thier distributions are likely to change significantly when the new taxes kick in, in 2011.

 

[leslie]

You are only the millionth new investor that has been sucked into the 'dividends are great' cult promoted by media and advisors. Please spend half an hour learning the very basics about dividends and why the media claims are wrong

Because the only buyers of income trusts are people just like you, they are overvalued.

 

[dwon]

Hi Steve,

Not to conflict with leslie but I did want to give you some options if you're still interested.

I understand leslies position but there are dividend stocks that also grow. I hold a few energy trusts that have doubled in the last 6 months. This is not normal! Just a symptom of the financial situation but in general the idea is to buy good companies, not dividends. If you buy a good company it can grow at a good rate even with good dividend yeilds.

If you want a high yeild stock in your portfolio there is an advantage to holding it in a TFSA in that the dividends are taxed at a higher rate than capital gains. This is especially good if you're looking for income, not that the first 5K will let you retire!

If you're worried about 2011 there are companies that have converted and still pay a decent dividend. STB-T and KNA-T are two examples. The other option is REITs which are, for the most part exempt (you need to check on the rules and the company's future plans). I'm a small time landlord, trust me, there's money in realestate! Some of these REITs have good management and can maintain a reasonable dividend yet still put money aside to buy new properties at the appropriate time. This can allow for decent growth as well.

Many other companies have already anounced their plans for the transition, some will reduce dividends and move toward growth, others will try to maintain the dividend to the best of their ability. Again, I'm for looking at the company vs big dividend in the long run. Will some of these companies stock drop as the change approches....Yes, but some will be just fine.

Just wanted to give you some options. Good luck.

 

[leslie]

Off topic, but just a corretion of the statement "dividends are taxed at a higher rate than capital gains". In fact their relative status depends on your marginal tax bracket. At the bottom income levels dividends are taxed at a negative rate (i.e. they generate a credit that can be used to offset a tax bill from other sources. See the current marginal rates for each type of income source (assuming prov tax = 50% more).

 

[dwon]

Thanks for the clarification leslie. I should learn not to generalize like that! As you point out there are several factors that affect the way the income is taxed. And thanks for the spread sheet, very useful information.

 

[Cal]

So...because of tax rules, these income trusts have to convert to corporations or go private by 2011.

However some REIT are exempted? Why is that?

And I did read leslies post about the dividends, and agree with some of the arguements, but if a person where to dividend chase...wouldn't it make sense to use the TFSA as that vehicle to eliminate taxes on the dividends completely?

 

[dwon]

Cal, I wish I could tell you why the goverment does half the things it does!

Here is a link to an explaination of the changes, it specifically mentions REITS and what is required to qualify.

http://www.osler.com/resources.aspx?id=11476

For example I own TR.UN (Temple Real Estate Investement Trust). Despite the name it likely does not qualify as a REIT under the rules mentioned in the link therefore it will likely have to convert.

Another example I own is (WRK.UN) Whiterock, they've stated that though they feel they currently don't qualify they intend to make changes that could allow them to qualify. Either way, it's up 45% in the last few months with a 20% dividend (based on my purchase price) so I'm not complaining either way. Unfortunatley this is not the one in my TFSA!

I think Riocan does qualify but I don't own it so I haven't looked that deep into it.

And yes, I would put something like this in a TFSA.

 

[Cal]

I am sure that there is a Canadian webpage somewhere that states the intentions of each of the trusts, in regards to these matters, and the qualifications of the REITs.

If anyone is aware of something like that, posting a link would be helpful.

 

[Rickson9]

RE: dividend paying stocks.

I wouldn't say that dividends are wrong for everybody, but what I can say is that dividend stocks weren't right for my wife and I. We don't need the extra cash flow nor do we want to pay taxes on a disbursement that we won't use. Having the companies retain the earnings in order to compound it at a far higher rate than I could hope to produce was the best choice for us.

 

[scomac]

I wouldn't say that dividends are wrong for everybody, but what I can say is that dividend stocks weren't right for my wife and I.

I'm glad you made that qualifier because dividends are perfect for those looking to generate a tax efficient income stream from their investments. In Ontario, you can earn $37,885.00 before paying any tax on dividends. Even up to $64,000.00 in dividends will attract only half the tax of comparable capital gains.

 

[Rickson9]

I'm glad you made that qualifier because dividends are perfect for those looking to generate a tax efficient income stream from their investments.

This is a good point. Dividend stocks are very good for individuals who are looking for a tax efficient income stream. My wife and I aren't looking for another income stream, but it would be perfect for somebody who is.

In Ontario, you can earn $37,885.00 before paying any tax on dividends. Even up to $64,000.00 in dividends will attract only half the tax of comparable capital gains.

This is also a good point. Dividends are very tax efficient and should be considered when in comparison to capital gains. For my wife and I, we don't incur any capital gains, however, we do receive dividends simply because our stocks pay them (as much as we prefer that they didn't). We currently value tax-free compounding (which is in excess of $37,885.00; and $64,000.00 for that matter) over dividends at this point in time.

 

[sprocket1200]

Be careful with dividends and taxation. I believe there are changes that have been announced for the next few years that will gradually tax dividends heavier (though not the point of marginal rates). I think this was taken on both federally and provincially.

just search, read, and do your homework.