With the U.S. stock market at record levels, we know it’s tough for income investors to find good deals among domestic stocks.
In fact, addressing “income tunnel vision” is becoming quite a common theme here at Wall Street Daily.
My next recommended course of action will not only provide the opportunity to generate a decent dividend yield, but it could also help protect you from potential economic meltdowns…
I’m talking about diversifying outside of the United States.
Of course, international stocks can bring country risks and impose withholding tax problems on U.S. investors… but there’s one place where neither of those problems arise and the dividend pickings are sometimes rich: Canada.
Interestingly, Canadian shares are a relative bargain today. You see, Canada’s economy receives a strong endowment from natural resources, so its currency tends to decline when resource prices are in retreat, as they are now. Yet non-resource corporate earnings are likely to be strong, and a currency rebound would give U.S. investors additional gains as Canadian dollar earnings, share prices, and dividends become worth more in U.S. dollars.
In addition, the 2008 crash proved that Canada’s banking regulation was superior – and less extreme – than U.S. policy. Add to that a stable and capable government, and Canada can be seen as a highly attractive investment destination.
Plus, Canadian dividend payout rates tend to be slightly higher than in the United States, so there are a number of Canadian corporations with dividends in the 4% to 6% range that make them attractive to income investors.
Canada also imposes no withholding taxes on dividends paid to individual U.S. investors. Thus, investors can buy Canadian shares in a tax-advantaged account such as an IRA and gain the full benefit of the dividends. Operating Canadian companies can also pay dividends to U.S. taxpaying investors and benefit from the favorable U.S. rates of dividend taxation.
The one disadvantage is that dividends are payable in Canadian dollars – and while U.S. brokers normally convert these automatically, the amount does fluctuate. With that in mind, let’s take a look at a few income opportunities situated just to the north…
1) Rogers Communications Inc. (RCI), which happens to own the Toronto Blue Jays baseball team, offers wireless telecom, cable, and media services throughout Canada. Currently, the stock is trading at 17x historic earnings and, remarkably, only 12x forecast 2016 earnings, an excellent rating for a media growth business. With a yield of 4.4% from its quarterly dividend (the next will go ex-dividend on June 10), it’s also an excellent income holding.
2) TransCanada Corp. (TRP) is a major energy infrastructure company operating mainly in North America. It operates in natural gas pipelines, liquid pipelines, and energy, and owns the Keystone XL pipeline system, as well as 19 electric power-generating facilities in the United States and Canada. It’s primarily a midstream company, which means it’s not overly exposed to fluctuations in oil prices.
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Currently, the stock is slightly overvalued, trading at 24x historic earnings and 21x forecast earnings. However, it does offer a 3.8% yield based on its quarterly dividend, which is next scheduled to go ex-dividend in June. IRA investors might also consider its Houston-based affiliate, TC PipeLines, LP (TCP), which is 24% owned and controlled through the general partner. TCP offers a more generous 5.5% dividend yield to IRA investors (its dividends don’t benefit from favorable treatment in taxable accounts, however) and is trading at roughly the same P/E ratio.
3) Wi-Lan Inc. (WILN) is an intellectual property licensing company that develops, acquires, and licenses patented technologies. It has over 300 licensees worldwide and is thus similar to the U.S. patent royalties company PDL BioPharma (PDLI). While more than half of WILN’s assets are intangible, it supports a steadily increasing dividend. Currently, the stock yields 6.7%, and its prospective P/E is just 6x based on forecast 2016 earnings.
4) Of the big Canadian banks – which proved to be more resilient than their U.S. counterparts in 2008 – the one offering the highest yield is the Bank of Nova Scotia (BNS). Currently, the stock is trading at a historic P/E of 12x and a prospective P/E of 9x forecast 2016 earnings. BNS also has a return on equity of 14.9%, which is higher than its U.S. competitors. Based on a quarterly dividend of 68 Canadian cents, it currently yields 4.2%.
Bottom line: In terms of both geography and sectors, Canadian companies offer attractive diversification for dividend seekers. With the Canadian dollar low right now, many stocks also offer prospects for a “double whammy” gain in both capital and income.