Continue investing in US dividend stocks at current subpar exchange rate?

Exchange-Rate

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.

Advantages

  • 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.

Disadvantages

  • 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

Advantages

  • 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.

Disadvantages

  • 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?

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28 Comments

  • Reply
    DividendMongrel
    April 7, 2015 at 4:57 am

    This is a tough decision to make. I didn’t realize the US dollar was that much stronger than the CAD. It will be interesting to see what the rise of interest rates will do to the market. I am certainly going to keep a little bit of liquid on the side in case there is a pull back.

    • Reply
      Tawcan
      April 7, 2015 at 3:41 pm

      Hi Dividend Mongrel,

      Yea, the US dollar value jumped and the Canadian dollar value crashed when the crude oil price dipped. Good point on the rise of interest rates, because it seems to be widely expected, I don’t think there will be any pull back. I guess we’ll have to wait and see.

  • Reply
    Sam the Man
    April 7, 2015 at 5:42 am

    I would invest in the Canadian market. Exchanging to USD, you will take a 20% hit. You should always have some USD cash on the side in case the exchange tilts one side.

    I started investing in Canadian stocks and ETF’s last month due to the exchange rate.

    • Reply
      Tawcan
      April 7, 2015 at 3:42 pm

      Hi Sam,

      Invest in the Canadian market is a good idea, however we already own quite a number of Canadian dividend stocks. Adding the same names might start tilting our sector allocation a bit. Taking a 20% hit is a tough thing to take for sure.

      • Reply
        Sam the Man
        April 8, 2015 at 7:58 am

        I wouldn’t take the 20% currency exchange hit. I just wouldn’t be comfortable with that kind of transaction. How about Canadian dividend ETF’s ?

        My Canadian portfolio holds XIU and XDV

  • Reply
    Roadmap2Retire
    April 7, 2015 at 7:55 am

    It is a hard decision and something that I wrestle with all the time. I usually end up splitting my funds (I use Questrade as well). Some CAD and some USD … in my RRSP.

    A good way around this problem is to invest in companies that have a good part of their revenue in US but trade on the Canadian exchange. Unforunately, it requires a lot of leg work – looking thru annual statemetns to find the revenue diversification. Banks are a good starting point – I shared a post a few weeks ago about this. Some other companies in my portfolio are: Agrium – which has close to 77% revenue in the US, Magna – which has 51% revenue in US, CN – which has 32% in US …etc.

    Of course, you are still left with a limited number of companies you can pick up to take advantage.
    R2R

    • Reply
      Tawcan
      April 7, 2015 at 3:44 pm

      Hi R2R,

      Good point on invest in companies that have a good part of their revenue in US but trade on the Canadian exchange. Banks are definitely a good starting point, but we already own quite a bit of Canadian banks in our portfolio. Agrium and Magna do look interesting though. Ideally we want to buy US stocks to gain more international exposures. There are very few companies in Canada that have the same type of international exposure like JNJ and PG.

      • Reply
        Roadmap2Retire
        April 8, 2015 at 12:44 pm

        Agreed. For some sectors like healthcare and cons staples, theres no choice but to actually go buy companies on the US market.

        Best wishes
        R2R

  • Reply
    Jane
    April 7, 2015 at 9:16 am

    I’m very interested to see what you end up deciding as I’m having the same dilemma myself. I’ve so far continued to buy shares in companies that I think are undervalued (BBL will likely be the next candidate) where even at the inflated share price I think it’s still at least fair price. So if I bought BBL at the $43US it’s hovering around it’d be like if I pulled the trigger at $53CAN which I think is still a decent price over the long term. Hard to find too many of these opportunities though.

    • Reply
      Tawcan
      April 7, 2015 at 3:45 pm

      Hi Jane,

      Good point on BBL. If we purchase an undervalued US/international stock in US dollar then it might be OK in the long run. Like you said, it’s harder to find an undervalued stock in the US markets right now.

      • Reply
        Jane
        April 9, 2015 at 9:45 am

        One last thought I had on this was to also look at the factors that are affecting the Canadian dollar and the stocks that you’re interested in. In the case of BBL it’s the decrease in oil along with copper/iron and concerns of China’s slowing growth. Well at least the decrease in oil factor is also the main contributor in the Canadian dollar. It’s a real simplification of the multitude of factors that go into currency and company valuations, however depending on the stock you’re interested in if it’s the same factor that’s causing depreciation in both the stock and the dollar, you may also find the inverse should oil recover and the Canadian dollar rise that the stock price may no longer be of interest to you. For the most part I don’t plan on purchasing too much more US/ADRs as I’m fairly happy with my current diversification but since no one can tell when the dollar will rise or when US markets will fall it’s hard to close the door completely.

  • Reply
    jd
    April 7, 2015 at 1:37 pm

    The CAD has held up better compared to other currencies–such as the Euro–than the USD. So it may not be a bad deal to convert your CAD to USD to buy ADRs of European companies. The lower USD/CAD rate should be mitigated by the higher EUR/USD rate.

    Withholding tax may be an issue though.

    • Reply
      Tawcan
      April 7, 2015 at 3:46 pm

      Hi jd,

      I’ve been ARDs of European companies as a way for further diversification. If we hold ADR’s in RRSP we won’t get hit by withholding tax as far as I know but need to look into that further.

  • Reply
    M from There's Value
    April 7, 2015 at 1:55 pm

    If I were you , I’d just stick to the Canadian market for the time being. Unless there are some major bargain opportunities, then it just doens’t seem worth it right now.

    We are facing the same problem here in the UK, the strong dollar is stopping me form buying any more US stocks, but there are plenty of UK stocks to choose from, and when the US dollar comes down to a more reasonable level against £, I might pick up some more US stocks.

    • Reply
      Tawcan
      April 7, 2015 at 3:47 pm

      Hi M,

      Very true. It’s a bit harder to find bargain opportunities in the US markets right now. Considering the price for Canadian banks are low right now, it might be very well worth it to invest in banks, convert them to US shares, and wait for the price/exchange rate to recover. My only concern, as pointed out in the post, is the heavy exposure to Canadian economy and the financial sector.

  • Reply
    Dividend Hustler
    April 7, 2015 at 9:29 pm

    Hey Tawcan. Good article. I’ve been pondering about this question myself. For myself, I’m gonna load up on canadian and go with the Couch pototo index for now until really good opportunities arise in the us stocks. So Im just gonna buy vanguard ETF’s for now and Canadian stocks I think that are undervalued. US is expensive and with our timeline of 30 plus years to invest, whats the rush? Take care.

    • Reply
      Tawcan
      April 9, 2015 at 3:31 pm

      Hi Dividend Hustler,

      I see you purchased BMO to avoid converting to US dollars. That’s a great way to go. Good point about the long time horizon, definitely something to keep in mind.

  • Reply
    RICARDO
    April 8, 2015 at 10:05 am

    Hi TC;
    I do keep my eye on a few US stocks but the majority of my portfolio is in Cdn equities. I used to have JNJ but sold out for KMI. I have not regretted that one yet.
    At any rate, with the difference in exchange rates right now you end up playing two games of cards at the same time. One is the obvious stock value/divs. Is the stock going to go up or down. If you answer “both” you are correct. So that is one game that can be mitigated somewhat with dividend paying stocks. Game # 2 is the exchange rate. Is it going to go up or down? Again “both” is the correct answer but where do YOU situate yourself? If you bought US stocks last year at this time you are still probably ahead of the game even if they went down a bit. Can you say the same in a year’s time? Or in other words, how low do you think the Cdn$ will slide before going back up to par? It will – some year.
    I have enough problems playing one game. So I have backed off from the US equities for now – unless a bargain appears.

    RICARDO

    • Reply
      Tawcan
      April 9, 2015 at 3:32 pm

      Hi Ricardo,

      It’s challenging when you start dealing with currency rates that’s for sure. Playing two games at the same time is tough, it’s definitely a good idea to keep life simple and only play one game.

  • Reply
    James
    April 8, 2015 at 5:31 pm

    Thanks for posting the timely article Tawcan. I’m struggling with the same dilemma, and am dealing with an even worse exchange rate through Itrade. In the last year, I’ve only pulled the trigger on a couple of US stock purchases that I thought were exceptional opportunities (KMI and OHI). That said, I liked the idea of a previous poster of looking for solid DGI companies in Canada with international exposure.

    On a side note, I’d love to hear about your experience using the Questrade dual currency RRSP. I’ve been thinking about switching.

    • Reply
      Tawcan
      April 9, 2015 at 3:34 pm

      Hi James,

      I really like Questrade’s dual currency RRSP. It allows us to receive dividends in US dollar and use this cash to buy more US dividend stocks whenever we have sufficient amount of cash. It’s a lot better than having to convert back and forth between the different currencies. This was one of the key reasons why we went with Questrade for self-directed RRSP rather than TD Waterhouse.

  • Reply
    Jeff
    April 9, 2015 at 8:49 pm

    Hi Tawcan, I thought about opening an RRSP account with Questrade but didn’t know too much about it. Currently, my RRSP is with TD e-series mutual funds account but I thought about opening an RBC Self directed RRSP. If there are 3 trades made in a quarter, they waive the annual fee. I think I am going passive invest my rrsp though and get US exposures through index funds and ETFs.

    • Reply
      Tawcan
      April 10, 2015 at 1:24 pm

      Hi Jeff,

      I like Questrade because it offers more options than TD Waterhouse. TD also charges you some sort of “management fee” on self-directed RRSP accounts, which I think is ridiculous. Passive investment via index funds and ETFs to gain exposure to US equities is a great idea.

  • Reply
    BeSmartRich
    April 10, 2015 at 3:40 am

    I have been asking the same questions for a while now. 80% my portfolio is invested in US now and considering attractive valuations on Canadian banks and oil companies, I am thinking of selling all VTI in my and my wife’s TFSA and switch them to Canadian stocks instead (as there is withholding charge in US dividend incomes in TFSA). I will still invest US stocks through RRSP in the future.

    BeSmartRich

    • Reply
      Tawcan
      April 10, 2015 at 1:26 pm

      Hi BeSmartRich,

      Interesting that 80% of your portfolio is invested in US now…. personally I wouldn’t sell VTI to re-balance, I’d rather buy more VCE or VCN to re-balance that way.

      • Reply
        BeSmartRich
        April 10, 2015 at 5:28 pm

        Thanks Tawcan, It is a tough decision for me. I just don’t like withholding charge on the dividend income that I receive from VTI. So annoying. Haha

        BeSmartRich

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