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Discussion Starter #1
A discussion started in another thread that had nothing to do about the thread at hand, but the discussion I think is very interesting, may be of use to others. It may also help to get clarification from other members that have more experience than I. So I thought it would be worth moving it to a different thread. ;)

The discussion started my me stating:

Totally agree; but I think buying good div stocks even now that are paying 4-5% is better
...
Even now, I'd rather be making 4 -5 % on div yield's with my 'hand firmly on the exit handle' if necessary as you put it.
and HaroldCrump asking:

Why would you buy common stock for a measly 4 - 5% yield when there are good quality (A and above) short-term bonds paying that much?
Unless you have reason to believe that there will be significant capital gains on those stocks in the next few years, I don't see the logic of buying stock simply for a 4% dividend.
My reply was:

1) bond income is taxed at 100% of my tax rate (~45%), dividends are not even close to that.

2) I do see long term capital gains in stocks, which when and if sold, only 50% of gains are taxed, and besides, I have so many cap. losses from dumping my broker and buying equiv. ETFs and sector stocks during the crash that I've got a lot of cap. gains that will not be taxed at all. ;)

3) I do have a large portion of my portfolio in bonds (bond ETFs as we have discussed before), so I have nothing against holding bonds as part of a portfolio for the extra security, but after tax they do not compare to div's, even at 4-5% for an income stream.

Comparing a 4-5% paying bond vs 4-5% paying div stock, from a pure yearly income point of view, is not the same thing once you have paid tax on your yield.

Someone more knowledgeable than me (leslie ;) ), please correct my statements above if they are not correct.
and I furthered it with:

I found this site that seems to have a nice and simple calculator for what your tax rates will be for different types of income depending on your total income level:

http://www.walterharder.ca/MarginalTaxRateCalculator.html

Note sure how accurate it is, but it seems reasonable from my experience and learning.

So for someone like me, in Ontario, non registered investments:

Ordinary income, like interest from bonds: taxed at 46.41%
Small Business Dividends: taxed at 31.34%
Large Corp. Dividends: taxed at 23.96%
Cap gains: taxed at 23.2%

So 'large corp div's' and cap. gains are taxed at 1/2 the rate as interest income.

Never realized / knew there was a difference between 'Small Business Dividends' and 'Large Corp. Dividends'. Does anybody know about this difference and how you find out what company X div's fall into?
So, after all that re-iteration, what are your takes on receiving interest, dividends, and / or ROC as your yield components? Or do you not care about yields and just focus on making capital gains? Or a mix? Which do you prefer and why?

Thanks.
 

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I love Canadain dividends for the negative effective tax rate in BC. I like capital gains too but not the taxes I have to pay on them.

ROC? Not much use for it. I figuree if I'm being payed my own money, its not really income.
 

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Discussion Starter #3
I love Canadain dividends for the negative effective tax rate in BC. I like capital gains too but not the taxes I have to pay on them.

ROC? Not much use for it. I figuree if I'm being payed my own money, its not really income.
Ya, I used the calc. in the link in the original post and even in Ontario, if you have an income of 40,000, you are paying -3.x% tax on large cap dividends, compared to 24% on interest income and 12% on cap. gains. Big difference. The more you make, it seems the less of a difference there is between large cap div's and cap gains.

Regarding ROC, is it really that bad? Is ROC not just basically deferred capital gains until you sell, so as you get the ROC you pay no tax, but when you sell you are paying cap gains tax rates on the adjusted cost base (purchase price - ROC received = cost base)?

So as an example, if you hold something that is paying 10% ROC for 10 years, and has the same stock price after 10 years compared to when you purchased it, then have you not made 100% return, as if the stock price had doubled, but also only are paying cap gains on 50% of the original purchase price? So you are really only paying 25% out in tax and have had 10 years of defered tax? Is my understanding of ROC incorrect?

Maybe this made up example is a bad one because it never really happens that way with companies that pay out 10% ROC / year, but I gave it as an example to further discussion.

Still, with the ROC example above, if accurate, it seems ROC is more than just getting your money back.

Again, I may be not understanding ROC.
 

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Discussion Starter #4 (Edited)
What you are going to pay in tax next year is really not a major concern. It is the individual tax pmts you pay year over year, including that final tax pmt your estate makes when you die, that are most meaningful.

The problem is that your tax rate (broken out as divs, capgains, interest etc) is going to vary quite substantially year over year as your various investments (reg/nonreg/equity/etc) come in and out of play over time.

It is a complex determination. In addition to the type of taxation, you must consider the time value of money effect, indexed brackets, clawbacks, age credits. Not an easy calculation.
I think for estate planning your points are very valid, but I think the tax rate I pay on investment income year to year is very important, especially if one is planning is to gain FI via investment yields. ;)
 

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In addition to the tax pmt in your final year, taxes and tax rates can change drastically from year to year. Just because your current year's tax rate is a certain amount... isn't to say that it will be the same over the next few years, or over the next 20 years. It can vary wildly, and from a planning perspective, keeping a constant rate of taxation year over year may not necessarily be the most optimum strategy (for either you or your estate)
 

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In my opinion I prefer stock that pays rising dividends over bonds. Bonds are fixed income. They pay what they pay and that is all, and in the end you get your principle back.

Dividend growth stocks "should" pay increasing dividends, so your income grows year after year, and as a bonus your stock price "generally" will be in line with the dividend increases. Unless you overpaid to begin with.

For me the plan is to buy my dividend stocks over time and eventually withdraw the dividends only, not worrying about stock price. In a non registered environment you also get the advantage of never paying capital gains tax until you die, and even then you can donate your stock to a charity, keeping it from CRA's grubby little hands. The tax advantaged income is a bonus too, even more so for me because the plan is to retire in BC.
 

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Discussion Starter #7
Does anybody know what the difference is, and how to determine what a specific company falls under for Small Business Dividends vs Large Corp. Dividends, as they seem to be taxed very differently.

Large Corp. Dividends seem to have a clear tax advantage.
 

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Discussion Starter #8
For me the plan is to buy my dividend stocks over time and eventually withdraw the dividends only, not worrying about stock price. In a non registered environment you also get the advantage of never paying capital gains tax until you die, and even then you can donate your stock to a charity, keeping it from CRA's grubby little hands. The tax advantaged income is a bonus too, even more so for me because the plan is to retire in BC.
That is my thinking, and plan as well, but in Ontario, not BC. ;) Best of luck to both of us.

Although I do worry about stock price overall, not daily, but medium to long term trends, both for helping determine when to buy and maybe in unfortunate cases when to sell what I thought was a good div stock, as yield is directly tide to stock price and this can be a good and bad thing.
 

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I'm in the dividend camp. The 2% to 5% yields-on-cost make it very easy to administer a safe withdrawal rate for income in the future. The 'supposed' dividend increases also help account for inflation. If I was an Actuary, I could figure out the expected risk of dividend cuts to my income under this strategy but I'm not, so I can't.

However, the on-going tax that I pay on the dividends until I stop working/retire are annoying (darn that having money thing :) ). There is certainly a today-tax advantage to capital gains assuming a buy-and-hold strategy. I'm off to gummy to see if there is a xls that determines an optimum mix or at least something that shows the overall NPV of the two approaches.

Also, I believe it was leslie responding to my posts that pointed out that up to ~$20K income can be tax free using AMT. ...didn't understand that, on my to-do list to figure out what he said.

Leslie - I can't find that post, was that you stating that? Possible to please explain again?
 

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As a long-term investor with a 25-year time horizon and a pension plan, I have no use for any type of fixed income or "high" interest savings account. I am 100% in dividend stocks or ETFs. The non-registered/TFSA portfolio yields approximately 5.5%, which is above the 5% total return I use for all my calculations and projections. This doesn't take into account any eventual dividend increases.

In other words, I don't need any eventual capital gains to achieve my goals. They should be gravy on top. As long as dividends keep coming, the plan should work. I hold strong names that hopefully I won't ever have to sell until the latter years when liquidating the portfolio, and I reinvest dividends. Passive income, low tax rates and low expectations are the key!
 

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I'm off to gummy to see if there is a xls that determines an optimum mix or at least something that shows the overall NPV of the two approaches.
An XLS won't really do the problem justice. Remember, tax on your nonreg capital (divs/capgains/interest) doesn't happen in a vacuum. There are a variety of other tax-related entities (RRSP, salary/CPP/pension, etc) which are happening simultaneously.

The calculation (tax over time) is a very tricky endeavour.
 

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Discussion Starter #13
As a long-term investor with a 25-year time horizon and a pension plan, I have no use for any type of fixed income or "high" interest savings account. I am 100% in dividend stocks or ETFs. The non-registered/TFSA portfolio yields approximately 5.5%, which is above the 5% total return I use for all my calculations and projections. This doesn't take into account any eventual dividend increases.

In other words, I don't need any eventual capital gains to achieve my goals. They should be gravy on top. As long as dividends keep coming, the plan should work. I hold strong names that hopefully I won't ever have to sell until the latter years when liquidating the portfolio, and I reinvest dividends. Passive income, low tax rates and low expectations are the key!
This is my thinking as well, and I think is even more enforced because I have NO pension plan available to me. My div yield will be my pension plan. ;)
 

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As a long-term investor with a 25-year time horizon and a pension plan, I have no use for any type of fixed income or "high" interest savings account. I am 100% in dividend stocks or ETFs. The non-registered/TFSA portfolio yields approximately 5.5%, which is above the 5% total return I use for all my calculations and projections. This doesn't take into account any eventual dividend increases.

In other words, I don't need any eventual capital gains to achieve my goals. They should be gravy on top. As long as dividends keep coming, the plan should work. I hold strong names that hopefully I won't ever have to sell until the latter years when liquidating the portfolio, and I reinvest dividends. Passive income, low tax rates and low expectations are the key!
DrStan, care you to share your views on which dividend stocks/ETFs you are looking at right now?

I'm still undecided where to put my TFSA contribution this year, I already have the money in my brokerage account but still looking at which way to go.
 

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Discussion Starter #15
DrStan, care you to share your views on which dividend stocks/ETFs you are looking at right now?

I'm still undecided where to put my TFSA contribution this year, I already have the money in my brokerage account but still looking at which way to go.
I'm not DrSTan, but for ETFs I like CPD and CDZ; not sure if I would buy more right now though, waiting for a bit of a dip, waiting, waiting... ;)

Still if you are OK with 4 - 5 % div yield and with the possibility of loosing some on original purchase price in the short to medium term, I like these. Long term I do not see these loosing price wise even at today's prices, it all depends on your horizons.

In terms of true stock div's, BCE and T are hard to beat right now and they have not climbed 90% + like many of the bank stocks have.

Since it is for a TFSA so yield is yield from a tax point of view (i.e. no tax), then you may also be interested in something like FIE.A, which is still yielding 7.13% interest - 1.65 MER (yes high I know) = ~5.4%.

No I don't work for Claymore, but I do like many of their ETFs. ;)

Again, since it is in a TFSA, you may want to consider bond or bond funds as well which should have less risk than anything mentioned above.

If you want to get more risky in terms of capital preservation, then shop around the REITs and Trusts and buy some that are offering 8-15%+ yield. For example YLO.UN is still paying out 15%. I own some YLO.UN but sold 50% of my position with them a few weeks ago because I worry about what will happen after 2010.

My 2 cents worth.
 

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A discussion started in another thread that had nothing to do about the thread at hand, but the discussion I think is very interesting, may be of use to others. It may also help to get clarification from other members that have more experience than I. So I thought it would be worth moving it to a different thread. ;)

So, after all that re-iteration, what are your takes on receiving interest, dividends, and / or ROC as your yield components? Or do you not care about yields and just focus on making capital gains? Or a mix? Which do you prefer and why?

Thanks.
Hey, sorry this thread got buried in the last 2 weeks I've been away.
Going back to that discussion, I was not accounting for taxes when comparing the yield.
In reality of course tax matters and dividends are more tax efficient than interest income when held in unregistered accounts.
However, going back to a pure yield discussion, I would contend that for a measly 4% - 5% yeild, dividend stocks are not worth the risk.
At times like these when short-term A grade [corporate] bonds are paying 5% yield, why would I buy a dividend stock paying 5% dividend yield and open myself up for capital losses?
Debt is superior to common shares in terms of priority of payments as well as in the case of liquidation and ceteris paribus, hold the debt of the same company rather than the common shares.

And it is incorrect to say (like another poster said) that bond interest payments are "fixed" while dividends continously increase.
First of all, bond interest payments cannot be cut while dividend can be cut or stopped.
Secondly, you need to account for term.
Bond yields depend on prevailing interest rates (among other things) and change over time (increase or decrease).
In an inflationary environment (which is considered normal in capitalist economies), the nominal value of your interest payments will increase over time just like dividends (assuming you have a ladder of bonds or a bond ETF).

Having said that, dividend stocks have a place in all portfolios and I hold several.
However, a stock's gotta promise me significantly more returns than 4% dividend yield for me to consider holding it.
It's got to promise either a higher dividend yield (7% or more in my case) or a potential for capital gains in addition to a 4% dividend yield such that the total returns are still at or above 7%.
Once returns from any investment drop at the levels of a 5 year non-cashable GIC benchmark, I'm not interested any more.
 

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The Walter Harder link above for marginal tax rates for different income sources deserves a warning. The input required is your TAXABLE income. That is not the same as your actual income. You have to divide your cap gains in half and bump up your div by 45% (???).

There is another Cdn tax website that now also shows marginal tax rates by income source and by province. I believe its inputs are actual income - you check. It have a lot more 'line item' details (than the link below) because the tax brackets for each province to not line up with the Fed's tax bracket limits.

This is great. It shows the people are reading these discussion forums. There was a VERY long and mud-throwing thread a couple of years ago where I faced off someone who refused to admit that the marginal rates from dividends were actually negative. Up until then I don't believe anyone anywhere was telling people this, or posting the marginal rates by tax bracket. The whole point of these websites should be to spread a better understanding.

Here is the link to the spreadsheet that generalizes the Cdn situation assuming provincial taxes are 50% of Fed rates and the tax brackets are the same. This is 'good enough' for most planning except for Quebecers. It also shows the Alternate Minimum Tax because once you are retired this really becomes an issue.
 

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Harold bond interest IS fixed. You get your interest and that is all, so what I said was not incorrect.
Bonds also fluctuate in value but people buy them for income, hold them, and get their principle back after the term/
Sure dividends can be cut or eliminated. Bank of Montreal has been paying dividends since before Canada was even a country so the likely hood of BMO halting dividends while possible is not very likely. Even after a dividend cut its not like the money disappears and is buried in a big hole in someone's yard. It's still there.
As a company raises it's dividend, the share price will (long term) rise along with the dividend, almost at the same rate as the dividend.
 

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Harold bond interest IS fixed. You get your interest and that is all, so what I said was not incorrect.
For a given bond issue yes it is fixed.
But we were not talking about buying and holding only one bond.
We were talking about bond yields vs dividend stock yields in the context of 4% - 5%.
As a bond investor, you would typically buy several bonds and ladder them.
As and when they mature, you will buy new bonds at the then prevailing yields.
Therefore, for a portfolio as a whole over time, your interest rates are not fixed.
They increase and decrease based on several factors.
Nominal interest payments normally keep up with inflation or stay ahead (esp. in the case of corporate bonds), just like dividend yields.

Of course, dividend paying common stock is a very different asset class than a bond and should not be compared as apples-to-apples.
My response to ssimps in the context of a target 4% return for dividend stock was why bother, get a bond and sleep well.
 

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Are we talking laddering vs 1 stock or are we comparing 1 bond vs 1 stock?

IMO assuming the stock and bond both yield the same you come out ahead with the stock provided it is a dividend growth stock. Your "interest" grows every year, and the stock price comes along for the ride.
Bond interest is the same year after year. who knows what interest rates will be in 5 years?

Didn't the wealthy barber say to be an owner not a loaner?
 
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