Category: Investing

As some of you have already heard, Canadian Capitalist broke the news last week that RBC Direct discount  brokerage (read a review of RBC Direct) is offering a 1% payment for any assets transferred from another investment institution.  There are limits to the rebate but they are quite generous  ($2500 per account type).
I’m a big fan of passive low-cost investing which is why I’ve been using Questrade discount brokerage – they have  the lowest trading costs bar none.  I’ve been happy with their service and trading platform and wouldn’t hesitate to recommend them.  However, as my primary criteria for a discount brokerage is cost – the 1% rebate (non-taxable by the way) from RBC changes the equation dramatically so that it makes far  more sense for me to switch to RBC and get the rebate than it is to stay with Questrade even though their trades are cheaper.

Should you switch to RBC as well?

I plan to address this question more definitely next Tuesday (so check back).  There are a number of factors to consider – this RBC deal does not make sense for everyone.   I’ll come up with some better guidelines next week but the short answer is that for most people, it is not worthwhile to switch to RBC unless you have total assets of $100k (by household) because the higher trading costs ($29 if your assets are less than $100k) will negate the rebate.  If you are a frequent trader ie more than 50 trades per year then you might need even more than $100k to make it worthwhile.  Another factor is how long you keep the money at RBC – if you plan to move to a cheaper broker once the rebate money is paid out (next June) then you don’t need as many assets to come out ahead.
The big question which I hope to try to answer is “Should I move to RBC Direct or should I move to Questrade” – right now, those two brokers are the best deal in town depending on your situation.

I’ve been doing some research into dividends for a project I’m working on – I thought the various dividend dates would make an interesting post for anyone who owns dividend paying securities – either stocks or mutual funds.

Dividend dates are the relevant dates surrounding the dividend payments. These are important to know because if you own a stock or mutual fund that pays a dividend, the owner of the security on the day the dividend is paid is not necessarily the person who gets the dividend.

Payment date – this is the date that the company actually pays the dividend to shareholders who are eligible.

Record date – any shareholders as of this date will get the most recent dividend. If you are buying a mutual fund and want to avoid getting the next dividend then wait until after the record date to buy it. If you are selling a mutual fund and want to avoid the dividend then sell it before the record date.

Ex-dividend date – this is two business days before the record date – someone who buys the stock on
this date or later will not get the dividend.

Most companies have this information on their investor relations web page. For any particular stock or mutual fund, just go to the main website of that company and look for “investor relations”.

Why is this boring information important?

Mutual funds can sometimes pay large dividends at year end. With mutual funds, the unit price goes down by the amount of the dividend so when a dividend is paid, you don’t have any more money in the account. The problem with buying a mutual fund just before it pays a dividend in a taxable account is that you will get nailed with taxes which is not a good thing. This post covers a mistake that Moolanomy made when he bought a mutual fund just before it paid a big year end dividend. In his case, it wasn’t lack of knowledge of the dividend dates that caused the problem but his situation does illustrate why it’s important to know the dividend date details.

Let’s look at an example!

Bank of Montreal (BMO) – if you look at the investor relations dividend page, then you can see that the August dividend will be paid on August 25 and the record date is August 1. The ex-dividend day will be July 30 so if you buy the stock on July 30 or after then you won’t get any dividend. If you own the stock and sell it on July 30 or July 31 then you will still get the dividend. The reason for this is because of the 3 (business) day settlement period. You don’t really own the security for the purposes of the dividend until the trade settles on T+3 so for example if you buy a security on Aug 25 then you don’t really ‘own’ it until Aug 28 and will only get dividends if the record date is Aug 28 or after.

If you are looking for more information on mutual funds, index funds and ETFs then sign up for a Morningstar free account.  Morningstar is the industry leader in investment information.

In my recent review of “Rule #1” I talked a bit about people taking Buffett quotes and twisting them. A while ago during a conversation about “Rich Dad, Poor Dad” a similar idea came up that people can use aphorisms to mean whatever they want. One Peter Lynch quote that I think gets bent beyond recognition is “invest in what you know“.

Years ago I was working in San Francisco at the tail end of the dot-com boom (I think I may have caused the bust after I arrived). RIGHT at the height I got into buying tech stocks with a NY stock broker (JDS Uniphase and all the usual suspects). I liked to talk to people and say it was ok for me to be buying tech stocks since I worked in the field and had a deeper understanding of the technology than the man on the street (I was investing in what I knew, dontcha know!). This didn’t stop me from losing 75% when the bubble burst (and forced me to realize that I was just being greedy chasing the trend like everyone else).

During the boom, I was talking to one man who called me on my foolishness. He looked me in the eye and said “You may have a computer science degree and be working at a startup, but that has nothing to do with tech stocks. You don’t understand global demand for the various technologies being developed, you don’t understand the financing behind the companies, you don’t understand the coming economic cycles, etc, etc”. I was a bit annoyed at the time (who likes being called on their foolishness?), but if I’d listened to him and got out I could have avoided a pretty good shearing.

A psychologist I know gets a newsletter about pharmaceutical and biotech stocks and buys based on information from it because “it was his field, so he had a deeper understanding of it.” He isn’t someone who’d be particularly responsive to warnings so I just nodded and smiled.

My brother wanted to buy Lululemon’s IPO because his girlfriend shopped there and he saw so many new stores opening up. He quoted Lynch’s idea that he was seeing a trend before it hit Wall Street. I cautioned him that he wasn’t the only one who saw all the expensive yoga-wear being sold and that IPOs were notoriously volatile. Tim Horton‘s IPO got quite a bit of attention, mostly because people like their coffee I think.

In “Your Money and Your Brain” Jason Zweig talks about how investors, including professionals, tend to over-buy geographically nearby companies. I think its possible if you’re a domain expert or if you have extensive experience with a local company that you might be able to shave a small amount of time off of you company research (if that’s your investing strategy). However, I suspect just buying things just because they’re familiar is a very dangerous practice.

It was recently announced that Philip Morris put in a generous offer to buy Rothmans (of which Mr. Cheap is a little less than a majority owner).  On news of the offer, Rothmans stock shot up above $30 / share then sank back to a bit below it (to $29.71 as of the holiday weekend).  We received a reader’s question (from Mike’s sister!) asking what’s going to happen to Rothmans stock.  I’ll write up what I’ve read and my understanding of the process, please feel free to correct me if I get anything wrong and I’ll update the post (I’m certain many of our readers understand the process better than I do).

To start with, a share of stock is partial ownership of a company.  When an offer is made on an entire company, the person putting up the offer is sayings “I’ll give you $X for the whole thing”.  If the company rejects the offer, then its business as usual.  If the company accepts the offer, its ownership is transfered to whoever purchases it.  This can be another company (as in this case with Philip Morris), some legal entity (as in the case of the BCE buyout by the Ontario Teachers Pension Plan, or an individual (I don’t have an example of this, can anyone suggest when this has happened recently?).

When the offer is made, shareholders get to vote on whether to accept it or not.  More than 50%A certain number (usually 2/3rds – thanks MoneyGrubbingLawyer!) of the shareholders by VALUE (remember, you get one vote PER SHARE, not per person) must agree to the offer for it to go through.  Since there wouldn’t be much reason for the average shareholder to accept less than the current stock price (if they wanted to sell, they could sell it at the current price on the open market), the person trying to acquire the company usually needs to offer a premium (higher price) above the current price of the stock.

If the offer is approved (I’ve never actually gone through this personally), my understanding is at some point every share of the company is bought at the agreed upon price, the cash is transfered to the previous owners, and 100% ownership in the company is acquired by the purchaser.

If you’re in the minority that doesn’t want to sell, its tough luck.  Usually part of a corporation’s articles of incorporation will allow majority rules in situations like this.

This is the opposite of when a holding company sells another company that it owns (as Philip Morris did with Kraft and as GE wants to do with its appliance business).  In this case they package it up as a separate company, sell it to someone else who wants it, and it now exists as a separate entity (and the selling company now has a bunch more cash).  They can even do any IPO and sell the newly created company directly to the public.

There are all sorts of business, legal and tax reasons why a company would want to purchase another company (or sell part of itself).

After the purchase goes through, and the cash has been received, for the previous shareholder its as if they had chosen to sell the stock.  They are liable for capital gains if the price its acquired at is higher than their purchase price (which is likely if they bought it years ago).  This is why BCE shareholders were squawking so much about the acquisition, they knew it was going to lead to a hefty tax bill for them.

Currently the board of directors at Rothmans has recommended that shareholders accept the offer, which is a good sign.  The price went ABOVE $30 briefly, because there was a feeling that a higher price may be forthcoming if enough shareholders didn’t bite at $30.  The famous Canadian investor Stephen Jarislowsky (author of “The Investment Zoo“)’s company owns 13% of Rothmans, and he’s known for holding out for high prices before approving sales.  Conversely, the price will sometimes be lower than the buyout price, which reflects both that the payment will be in the future, and investors’ concern that the deal won’t go through (thanks Preet!).

If shareholders push for a juicier offer, and its not forthcoming, the stock may sink back to its previous level and we can continue as before.

As I said in the introduction, please highlight anything I’ve got wrong, as I’m not 100% sure about this information.

This is part two of my three part series comparing various Canadian and American investment accounts.

This post deals with the Canadian RESP and the U.S. 529 plan which are both educational savings accounts. For the 529 account we are only looking at the 529 savings account (not the pre-paid plan). In part one I looked at two retirement accounts – the Canadian RRSP account and the American 401(k) account. In the next post I will be comparing the TFSA vs Roth IRA.

Please note that this is just a general comparison – it’s not intended to be reference material for any of the accounts listed. Not all of the rules are consistent within each country so there are exceptions to the “similarities” and “differences”.

A big thanks to Madison from My Dollar Plan for helping out with this series.

Canadian educational savings account

RESP (Registered Education Savings Plan )

US equivalent

529 savings plan

Similarities

• These accounts are intended for post-secondary educational purposes and have penalties if the money is not used for that purpose.
• Tax sheltered – any income, dividends, capital gains earned in the accounts are not taxed.
• After tax money is used to contribute to these accounts. This means that there is no tax refund for any contributions (some states are the exception however).

Differences

• RESP gets a 20% grant (matching contribution) based on the contribution amount where the 529 can be eligible for different grants (including zero) according to the state.
• RESP is run by the federal government (except for one province) – 529s are administered by each state.
• 529 contributions limits are much higher than those of the RESP.
• RESP withdrawals used for educational expenses are taxed in the hands of the beneficiary – 529 withdrawals used for educational expenses are not taxable.
• RESP accounts allow any type of investment – 529 plans are limited to mutual funds and annuities.
• The RESP program has way too many rules – I can’t imagine the 529 is as complicated. 🙂

Conclusion

Overall the two educational savings account types are reasonably similar given that they are both tax sheltered and require that the earnings be used for educational purposes. It is difficult to compare these two accounts beyond that since there are different rules for each state. If you live in a state where there are no contribution benefits to the 529 then that is a disadvantage to the RESP (not to mention the 529 account in all the states that do give some contribution relief). On the other hand it’s possible that your state might give contribution tax benefits which are greater than that of the RESP.

I had a request recently from a blogger friend of mine – Paid Twice, who thought it would be a good idea to do a post on the common U.S. and Canadian investment accounts and try to find which ones are comparable. This post deals with the Canadian RRSP and the U.S. 401(k) plan – other accounts will be covered in future posts. I’m only going to do the more common accounts, since the more obscure types probably aren’t known very well on either side of the border.

Please note that this is just a general comparison – it’s not intended to be reference material for any of the accounts listed.

A big thanks to Madison from My Dollar Plan for helping out with this series.

Canadian retirement account

RRSP (Registered Retirement Savings Plan )

US equivalent

401(k)

Similarities

• Money in these accounts are considered pre-tax which means that you are taxed at marginal rates upon withdrawal. Basically you add any withdrawals to your income in the year you do a withdrawal.
• Grow tax free inside the account. No taxation for capital gains, dividends, interest etc.
• Both types have annual contribution limits.

Differences

• 401(k) is setup with your employer plan whereas an RRSP can be setup with any financial institution.
• 401(k) contributions can only be made through payroll deductions whereas RRSP contributions can be made through payroll deductions (commonly through employer-sponsored group RRSP plans) as well as cash (after tax) contributions which then generate a tax rebate.
• 401(k) has a 10% penalty (with some exceptions) for withdrawal before the age of 59.5 (why the .5?) – the RRSP has no withdrawal penalties.  There are some exceptions where you can withdraw 401(k) money early.
• Contribution limit for an RRSP is set as a percentage of the previous years income (18% or a maximum of $20,000). the 401(k) annual limit is $15,500 for everyone regardless of how much money you earn. Americans older than 50 can contribute an extra $5,000 per year.
• In the RRSP – unused contribution limits can be carried forward indefinitely. 401(k) contribution amounts have to be used each year or they are lost.

Conclusion

These accounts are very similar in that the contributions are made pre-tax, no taxes are paid inside the account and withdrawals are taxed at the marginal income rates. The US 401(k) has more restrictions in terms of setting up an account as well as withdrawals. I personally like to have less restrictions on retirement accounts but in some cases the restrictions will prevent people from taking the money out for silly reasons.

Here is more info on RRSP contribution limits.