Would you buy bank dividend stocks right now? | Page 3 | General financial discussion | Discussion forum

mechone, you make a good point. Lots of talk focuses on the potential to lose money on stocks, but it must also be expressed the opposite is very possible too every time you buy a stock, i.e. you can make nice gains too (indeed history shows that the latter is the norm, if you make good choices). Unlike with HISAs & GICs, potential exists on both sides when you buy shares, needs to be considered in a complete analysis.

I've never paid much attention to what the market, other stocks, or other comparables' returns were, e.g. if inflation was 3% and I made 9% it didn't bother me that the comparables did 15% that year. If you make good choices, sometimes you'll beat the comparables and sometimes you won't, just the way it goes.

Loonie said
Doug, is your "likely" any more likely than canadian100's?  

Fair point, Loonie, and it's subjective; however, yes, my "likely" was more likely than canadian100's "quite likely."

Cheers,
Doug

I was looking to set up a defensive portfolio in these uncertain times and an all distribution portfolio sounded good. I now have more than 30 different positions (stocks, ETF’s & Mutual funds) and they all present a 10% distribution or better. Most distribute monthly, some quarterly and a few yearly. I receive a mixture of capital gain, interest and dividends. Best portfolio I ever had, I’m still tweaking it, but it does, for now, bring in a steady stream of cash. All distributions are reinvested in a bond fund for safer positioning. I keep an eye if someone cuts or lowers below 10% (I sold two positions just last week because of this: HPF.TO & NXF.TO). Next week, the newer addition to my ticker family will be NWX.VN. Dividend yield is presently at 12,24% and it has had a very good return over the years. As far as I’m concerned, a good distribution yield is a defensive measure as long as the yield is maintained. Yes, I’m retired now, but this portfolio is working very well for me, 31,85% return before tax in 2020. The only risk is a large capital loss and a yield cut at the same time, but I must say, I watch my portfolio and the stock market like a hawk. Stay safe.

RetirEd said
Do we have someone here who can cogently explain the distribution/capital gain/return of capital concepts and effects? I haven't been able to sort it out from glossary resources - it's too complex!

The most general explanation would be best. But in my case, I'm looking at putting the (low)-risk experiment into my TFSA so that the returns (most likely higher than my CIG stuff) would be tax-free. How can we control the "return-on-investment" split? Can we?

I understand that dividends are taxed at a lower rate (part exemption and part 1/2 tax rate?) but I can't figure out the details of this from my tax guide. It looks to me that, with very low taxable income (collecting GIS, as I dribbled all my RRSPs into TFSAs over the years when income was low) I should just keep the interest income non-registered.

Or is this all too complex for me to dabble in? (I have only a math degree and lots of computing experience, but I'm self-educated in finances.)
RetirEd  

In very simple term, consider this example when a stock pays out 100% of its earnings every year :

stock price: $10
earnings per share: $0.50
Dividends pay out each year: $1.50

To be able to pay $1.50 each year without borrowing the $1 it needs, the company sell some asset to be worth $1 per share, so they can pay out $1.50 in total ($0.50 earnings + $1 from asset sale)

On your tax slip, it will show $0.50 eligible dividend, $1 return of capital.
The dividend is taxable and you pay tax (after div credit) the year it is paid.
The Return of Capital is not taxable until the stock is sold, but it reduces your capital cost. So after year 1, your cost is $10-$1 = $9 for the purpose of capital gain/loss tax at stock sale time.

From a zero sum game theory, the "asset" of the company is now worth $9 (compare to $10 at the beginning of the year) all else being equal.

savemoresaveoften said

In very simple term, consider this example when a stock pays out 100% of its earnings every year :

stock price: $10
earnings per share: $0.50
Dividends pay out each year: $1.50

To be able to pay $1.50 each year without borrowing the $1 it needs, the company sell some asset to be worth $1 per share, so they can pay out $1.50 in total ($0.50 earnings + $1 from asset sale)

On your tax slip, it will show $0.50 eligible dividend, $1 return of capital.
The dividend is taxable and you pay tax (after div credit) the year it is paid.
The Return of Capital is not taxable until the stock is sold, but it reduces your capital cost. So after year 1, your cost is $10-$1 = $9 for the purpose of capital gain/loss tax at stock sale time.

From a zero sum game theory, the "asset" of the company is now worth $9 (compare to $10 at the beginning of the year) all else being equal.  

Good simple example, but earnings can often be too conservative of a metric to use, as it includes usually one-time non-cash charges which reduce earnings per share but which have no bearing on the cash flow. A better metric is whether dividend payout ratio relative to a company's cash flow. Will vary by industry, but generally, a company paying out more in dividends than cash it generates is not good. 🙂

Cheers,
Doug

RetirEd said
SAVEMORESAVEOFTEN:

"So after year 1, your cost is $10-$1 = $9 for the purpose of capital gain/loss tax at stock sale time."

So exactly what does this mean for the holder? Does it mean a higher capital gain because the "original" price was lower? Or...
RetirEd  

It means when you do sell the shares, your cost price is now $9 a share, and not the $10 that u paid initially. So if the shares are sold at $11 year later, you now have a $2 capital gain ($11-9) instead of ($11-10) if the entire distribution of $1.50 was deemed dividends instead of $0.50 dividends and $1 ROC.

And the capital gain tax on $2 is actually fair cuz you did only outlay $9 and ends up getting $11 when you sell the shares.

dougjp said

Yes, although I would say it differently - a higher capital gain because the 'Adjusted Cost Base' (the term commonly used) became lower. After years of this, after finally selling, this can cause a nasty tax 'surprise' if not prepared. Using this example and extending the same circumstances for 10 years, the adjusted cost base would be zero and the entire sale price of the shares would be the capital gain.  

I would describe it as "unexpected/surprise" instead of nasty. If the adjust cost base becomes zero, yet the shares are still worth "something", you did earn a capital gain, just not in the typical version which is the original cost price vs final sale price. And the tax timing is the same as a "normal" capital gain so to speak.

I am glad G & M confirms my return on BNS return with reinvested dividends as -.30% for 2020.

I bought my first BNS shares in my RRSP. I was cashing RRSP GIC's and depositing to RRSP brokerage account back then. The following year I purchased $1,000 BNS shares in a non-registered account. I made an optional one time purchase of $1,000 a month later. I setup dividend reinvestment. Yes I paid tax on the dividends. You get a dividend tax credit. After several years I decided to put them in my RRSP. RRSP is a tax deferral investment strategy. Although I started investing in a RRSP a long time ago I am not sure if it is a better strategy than paying the tax in a non-registered account. TFSA was not around back then. This year I must withdraw money from RRIF. I will pay tax on the minimum withdrawal amount. I tried using Turbotax planner to see how much extra tax I pay for RRIF withdrawal. I think my marginal tax rate will be 2% less than the days when I was claiming RRSP deductions. Pay the tax NOW or pay the tax LATER. Nothing is FREE.

RetirEd said
if the stock pays dividends, these are deducted from purchase price to get the "adjusted cost base"? 

That is only true if the "dividend" is classified as ROC (box 42) on the T5/T3 instead of dividends (box 24). Box24 is taxable dividends the year it receives, box42 is the one that reduces ur "adjusted cost base". You keep track of box42 manually on each stock u own that has ROC as part of distribution. Most stocks do NOT have ROC as part of distribution. Usually its only income trust or etf that may have it from time to time.

For example, I have XIU and every year on the T3, it will show me how much ROC in box42 which I have to deduct from my adjusted cost.