Canadian Dividend Investors
1
Own Dominant Canadian
Companies
Invest in what you know.
1
Peter Lynch
The most important reason you should concentrate your investments in Canadian public companies, in my view, is because Canadian public companies and stock markets are subject to much stricter regulation and oversite by government agencies, as compared to many other countries, including the United States.
In addition, you or one of your friends may be a customer or an employee of one of the major Canadian public companies. In any case, it is relatively easy to get reliable financial information on public companies headquartered in Canada. In addition, any unusual events that might affect a Canadian company's financial prospects will be quickly reported by the media.
Another important advantage of receiving dividends from qualified Canadian companies is that the Canada Revenue Agency offers a significant tax credit on eligible dividends, as indicated in the adjacent table. Note that for illustrative purposes, I have assumed that the only source of income is from dividends. Your actual tax savings will be different from those shown here, depending on your total taxable income, including income from all other sources, aside from dividends.
Another important advantage of receiving dividends from qualified Canadian companies is that the Canada Revenue Agency offers a significant tax credit on eligible dividends, as indicated in the adjacent table. Note that for illustrative purposes, I have assumed that the only source of income is from dividends. Your actual tax savings will be different from those shown here, depending on your total taxable income, including income from all other sources, aside from dividends.
Finally, it is worth noting that dividends received from foreign companies will be affected by changes in currency exchange rates, which may have a positive or negative effect on the purchasing power of the dividends you receive. Changes in exchange rates are unpredictable and therefore the purchasing power of dividends paid by foreign companies are also unpredictable.
Figure 7.1: Personal tax rates on dividends from foreign companies compared to tax rates on qualified Canadian companies.
In Canada, there are four economic sectors that, for a variety of reasons, are relatively stable and profitable. These industries and the companies that dominate them are listed in Figure 7.2 below. These companies provide essential services to Canadians, and they operate in industries with limited competition. As a result, they have sufficient pricing power to ensure that they are consistently profitable even under difficult economic circumstances. Finally, while it is possible for their customers to move to one of their competitors, it is usually inconvenient and time-consuming for them to do so.
Figure 7.2: The dominant Canadian companies operating in stable industries.
1. Lynch, P. 1989. One Up on Wall Street: How to Use What You Already Know to Make Money in the Market. Simon & Shuster Paperbacks, New York, NY.