We recently added fresh capital to our Questrade RRSP accounts as part of our 2015 contribution. There are many reasons why we choose Questrade as our main discount brokerage. One of the reasons is the commission free ETF tradings, and the other reason is that Questrade offers dual currency registered accounts. To avoid paying the 15% withdraw tax on dividend income, we only hold US dividend stocks and ADRs in Questrade self-directed RRSP accounts to take advantage of the tax treaty between Canada and USA. Life is a lot simpler when we can have all the US dividend income deposited in the US currency without having to deal with currency conversion. This is something that we need to deal with on a monthly basis with Baby T's dividend portfolio and the accounting can get a little complicated at times.
The newly added capital does raise a good question - do we convert the full amount to US dollar and continue investing in US dividend stocks at current subpar exchange rate? Or should we keep everything in Canadian currency and invest in undervalued Canadian dividend stocks?
Scenario 1 Convert the full amount to US dollar and invest in US dividend stocks
Note: Since Questrade charges 2% to exchange currency, if we just buy US securities in Canadian dollar without converting to US dollar first, we will have to face not only by the exchange rate but the additional 2% exchange fee as well. This is why it makes sense to utilize Norbert's Gambit for currency conversion.
- Convert everything to US dollar will provide us with peace of mind. Once we convert everything to US dollar, we just need to determine which US dividend stocks to purchase. Currency rate do fluctuate overtime so it's not something we can control or time. There's no guarantee that the exchange rate will rebound. If the depressed crude oil price continues, there's no reason why we can't see the ~70 cents exchange rate that we saw in the mid-90's.
- The US stock markets offer wider diversification compared to the Canadian stock markets. Canadian stock markets are more concentrated on financial and energy sectors. There are many more global consumer, technology and health-care companies available in the US markets that are not available in the Canadian markets; there are also more US dividend aristocrats than Canadian dividend aristocrats.
- American depository receipts (ADR) are only available in US stock markets. If we want to purchase stocks of international companies like Royal Dutch Shell, BP, or BHP Billiton, the only way is to purchase ADR's listed on NYSE.
- The US economy is stronger than the Canadian economy right now. In fact, it's widely expected that the US interest rates will go up later this year. The stronger economy means some of the US Stocks are already slightly over-priced.
- CAN to US exchange rate is at 10 years low. If we were to convert $10,000 Canadian, we would only get $8,000 in US dollar. Does it really make sense to buy high? This would violate the concept of buying low, selling high.
Scenario 2 Keeping everything in Canadian dollar and invest in Canadian dividend paying stocks
- Many Canadian dividend paying stocks in the financial and energy sectors are undervalued right now. It makes sense to buy these solid companies at a discounted price.
- No need to worry about currency conversion. Keep life even simpler.
- Many Canadian dividend paying stocks offer better dividend yield than their US counter parts.
- We already own many of the big name Canadian dividend stocks like Royal Bank, TD, Suncor, and Canadian Natural Resources in our dividend portfolio. Buying more of these stocks means we will be heavily invested in the Canadian financial and energy sectors.
- Offers very little geographical diversification. There are no truly global consumer companies in Canada. Even strong consumer brands like Metro and Loblaw, the majority of the business revenues come from Canada consumers.
- Somewhat limited choices when it comes to blue chip dividend paying stocks.
The majority of our holdings in our RRSP accounts are in US securities. In fact, if we only look at the dollar value and ignore the currency rate completely, securities held in US dollar account 71.31% of our RRSP portfolio. If we convert these securities into Canadian dollar using a 1.2564 exchange rate, the percentage increases to 75.74%. When we look at our dividend portfolio as a whole, securities held in US dollar account about 33% of our entire dividend portfolio. Ideally we would like to see this number around the 50% range so our dividend portfolio is not completely exposed to the Canadian economy. This would mean holding US and international dividend stocks in US dollar. Having a portfolio that's concentrated in one country and exposed to only certain sectors means a higher risk to see a sudden drop in portfolio value when the country's economy or the sector is going through a rough patch. This is what's happening to the Canadian economy because it relies so heavily on energy sector; the depressed crude oil price is making a negative impact to the overall Canadian economy.
Right now we are leaning toward converting everything to US dollar and continue investing in US dividend stocks. We're not 100% convinced this is the way to go though. Another possibility is to invest in an undervalued Canadian dividend stock like Royal Bank, journal the shares to US shares, then hold onto them until the stock price and exchange rate go back up. In the mean time we'll continue collecting dividends. Risk aside, there's no guarantee that the stock price and exchange rate will go back up. It is also possible that by the time we sell Royal Bank, the US dividend stocks that we are interested in may be over-valued that we cannot justify pulling the trigger. I'm sure Mrs. T and I will have further discussions on this topic over the next few days and reach a decision.
What would you do in our scenario?