Being A Canadian Investor in the U.S. Market

The great turn-around in my stock portfolio began almost two years ago after I subscribed to an investing advice service that featured mostly American stocks.  Having experienced my losing ways in Canadian-only stocks, I figured with this fresh start that I would jump into owning stock in American companies, or at least stocks listed on the American exchanges even if some companies were Canadian-based.  Not that Canadian stocks were bad, but I was looking for a fresh start, so it was a psychological move more than anything.  Plus, I was excited about the opportunity to own some of my favorite American companies – some of the largest and most dynamic in the world – since I had also figured out how to do this using my online investing site.

With quality recommendations in hand, I eagerly started re-building my tattered, losing portfolio into the much stronger portfolio that it is currently.

Here are some things I’ve learned about being a Canadian investor in the U.S. market for the benefit of my fellow Canucks!

Save U.S. dividend stocks for your RRSP or RRIF

Some of the U.S. stocks that I bought for my TFSA (Tax-Free Savings Account) pay dividends.  However, I never found out until after I started receiving the first dividends that I was getting paid less than what I had calculated.  I was seeing things like this in my investing account activity:

withheld dividend

Only upon investigating did I realize that U.S. dividend-paying stocks are subject to a foreign dividend 15% withholding tax in TFSA and RESP accounts.  So if this particular stock was in my RRSP or RRIF instead, I would not be subject to this tax.  Count on our wonderful Canadian government to find a way to penalize savvy investors for not investing in our own economy.

My response to this has been to buy only low- to no-dividend U.S. stocks for my TFSA and to keep any decent U.S. dividend-payers in my RRSP.

Make sure you can easily convert between Canadian and American dollars

I do my stock trading self-directed and online through RBC Direct Investing, a very popular choice among Canadian investors.  I’m not writing this to promote them over others, but rather to write based upon what I’m familiar with.  I’m able to deposit my Canadian-dollar check and easily convert to U.S. dollars once the check has cleared.  Likewise, whenever I sell a U.S. stock, I’m able to easily convert back to Canadian dollars.

Whether you invest through an online service like this or in-person through a bank or brokerage, make sure that you can easily convert between these two currencies if you’re interested in owning U.S. stocks.  Also, ask if there are any extra charges to do this beyond the exchange rate.

Be aware of the exchange rate

When the Canadian dollar was on par with the U.S. dollar only two years ago, I had no idea at the time that ours would drop as deeply and quickly as it has versus the Greenback.  Right now, it costs me nearly $1.30 CDN to buy one U.S. dollar.  So when I converted to U.S. currency upon buying my first U.S. stocks back then, I didn’t realize that only two years later I could essentially add nearly 30 percent to my return on those earliest holdings due to exchange in addition to their share price appreciation.  That is, for every $1,000 CDN I converted to U.S. dollars back then, I would now have $1,300 in my own currency plus however much a particular company’s shares have appreciated if I was to cash out today.

My point is not to brag, but rather to be ready for the next time that the Canadian dollar grows closer in value to its American counterpart.  Seeing how Canada is currently teetering on a recession, mostly due to low oil prices, this won’t likely occur for at least a few years by my estimation.  However, it’s nice to have this plan tucked away in my mind if/when things change so that I’m ready to buy more U.S. stocks since I’m pretty sure the same scenario of an expensive U.S. dollar will repeat itself.  It has already a few times during my lifetime.

Use the exchange rate to decide where to invest

When I bought shares in Sierra Wireless back when the Canadian dollar was much stronger, I didn’t pay heed to the fact that I could also buy it on the Canadian TSX since it’s a Canadian-based company.  Again, I was enamored at the time with buying on U.S. exchanges and it’s a good thing that I was since, as I mentioned above, I currently have a much higher return on my investment when I factor in the current exchange rate.

Now that our dollar is so weak, if I ever finally decide to purchase shares in Canadian National Railway (on my watch list for quite a while now!), another dual-listed company, I’ll buy them on the Canadian TSX as opposed to the American NYSE.  However, if our dollar ever gets close to being on par with the Greenback again, I’ll most definitely buy shares on the NYSE, again banking on the likely premise that the Canadian dollar will once again lose ground against the U.S. dollar.

Don’t ignore Canadian stocks, just make sure they’re diversified

Once I realized that I was getting some of my U.S. dividends withheld, I began looking at my options north of the border, especially regarding Canadian stocks with a healthy dividend that would be a great fit for my TFSA.  In the process, I also learned about some incredible Canadian-based growth stocks, but I’ve always been leery of those that have most of their business in Canada.  One draw of some of the U.S. giants to me has been their dominant presence in many parts of the globe, such as Apple and Disney and Starbucks.  Such diversification is a key factor in which stocks I choose to buy.

However, there are some Canadian companies that also have a very strong and growing international presence, like Alimentation Couche-Tard and Agrium and Magna.  Couche-Tard (ATD.B), for example, is a juggernaut in the global convenience-store business, owning a larger number of convenience stores in the U.S. for example than it does in Canada.  It doesn’t pay a decent dividend right now, but when its expansion slows in the future, it’s likely to convert a bunch of its cash flow currently being used for acquisitions into dividends, and again that bodes better as a stock holding in an TFSA or RESP account than a U.S. dividend stock does.

I’m grateful for the incredible investing opportunities that exist in the United States, and that savvy Canadian investors have benefited from, and even more grateful that I’ve learned through some trial-and-error the best ways to invest there.  May you also be encouraged to add some “Red, White, and Blue” to your portfolio as well!

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