Any tangible or intangible good that you own. Example: your house is an asset.
Intangible goods would for example be a work that you have created such as a brand.
Companies that trade on the stock exchange issue shares. Each share constitutes a fraction of the company’s equity. When you buy a share, you become the owner of that company along with the other shareholders.
Obviously, the majority of investors will be minority shareholders because they hold a small fraction of the capital. Majority shareholders are those who own more than 10% of the outstanding shares.
Despite owning only one share, you may be invited to vote at general meetings for important decisions.
Currency risk coverage
When the manager has to replicate a U.S. index such as the S.P. 500 or the Nasdaq 100. It must acquire these assets in U.S. dollars. So, on a fairly regular basis, the fund has to convert the funds available in Canadian dollars into U.S. dollars. These conversions may be beneficial or have a negative impact depending if the Canadian dollar has appreciated or depreciated.
Many investors want to reduce this risk. To meet their needs, the majority of ETFs that reproduce a U.S. index offer a “hedged” version of their funds and sometimes another version that is traded only in U.S. dollars. Coverage acts as a kind of insurance. See the scenarios presented below:
|Scenario 1: Value of Canadian|
|Scenario 2: Value of Canadian|
|Non hedged ETF||Index return|
Minus foreign exchange loss
Plus foreign exchange gains
|Hedged ETF||Index return||Index return|
|US $ ETF||Index Return|
The investor chooses when to convert
The investor chooses when to convert
Dividends are paid by companies to their shareholders. They constitute a portion of the company’s profit. It is the board of directors which proposes a rate called (Ratio of payment of the dividends or ‘Pay out ratio’. The ratio is a percentage of the profit. Example, a company made a profit of 1,000,000 $, and it decides to pay 50% in dividends and the rest will be reinvested in the company.
Amount of dividends $ 500,000
Number of outstanding shares: 100,000 shares
Each shareholder will receive $ 5 in dividends.
Dividends can be distributed quarterly or annually. In rare cases, companies pay their dividends monthly.
• “declaration date”: The declaration date is the day on which the board of directors announces its intention to pay a dividend.
• “ex-dividend date”: Date to be retained, each person who holds the share on this date is automatically eligible to receive the declared dividends.
Example: the ex-dividend date is May 3.
You must acquire the share at least 3 business days before the ex-dividend date, which is April 27.
You can sell the stock on May 4th and you will still receive your dividend.
• “payment date” / “payment date”: The payment date is the date on which the dividend will actually be paid. Everything is done automatically, there is nothing you can do.
ETF is an exchange traded fund. This fund is managed by a professional manager. There are several ETF issuers in Canada:
• Banks (BMO, TD… etc)
• Investment companies such as (Vanguard, iShares, etc.)
There are currently over 1000 ETFs available on the market. There is an ETF for every type of investor. They are suitable for active or passive management.
What is an index fund?
There are several types of ETFs. And index ETFs are the most popular in the financial markets. In fact, the first ETF to be launched on the North American stock exchange was an index ETF. Index ETFs offer exposure to a large number of securities and sometimes to a whole stock market at a very low cost. Their main objective is to acquire, on your behalf, all securities that constitute a specific index in order to obtain the same return of the index minus management fees.
S.P. 500 Index
The S&P 500 Index, or the Standard & Poor’s 500 Index, is a market-capitalization-weighted index of the 500 largest publicly-traded companies in the U.S.
The S&P 500 is an excellent index because most of its constituents are large established US corporations. It’s well diversified across various sectors of the US economy. The index is widely regarded as the best gauge of large-cap U.S. equities. It can be easily used to express an opinion on the US economy in general. In other words, if you are bullish on the performance of the American economy in the long term, it’s probably the best index for you.
All ETFs that replicate the performance of the S.P. 500 index will have the same securities in their assets and at about the same proportions as the index itself.
The Nasdaq 100
The Nasdaq-100 is one of the world’s preeminent large-cap growth indexes. It includes 100 of the largest domestic and international non-financial companies listed on the Nasdaq Stock Market based on market capitalization.
This index is dominated by companies in the Information Technology sector.
An index of the 60 largest companies on the Toronto Stock Exchange. This index is dominated by the energy and finance sectors.
Dividend: Tax implications for owning ETFs
There are so many possible structures for an ETF. Below, we will discuss mainly three common structures:
if held in an investment account (non registered)
- Type 1: Canadian ETFs that invest in US or international stocks directly. There is 15% withholding tax that will impact the fund’s return;
- Type 2: Canadian ETFs that invest in US ETFs which invests in US stocks. There is 15% withholding tax that will impact the fund’s return;
- Type 3: Canadian ETFs that invest in US listed ETFs which invest in international stock. This is the structure that’s the least interesting for investors from a taxation perspective. 2 Taxes will be applied by the foreign country first and then the US.
if held in registered account: TFSA, RESP, RRSP
|Canadian ETF: 1$ dividend scenario||Taxes||Dividend received|
|1- Holding US or International stocks directly||-0.15$ (withholding tax from US or foreign jurisdiction) Creditable||0.85$|
|2- Holding US listed ETFs that invest in US stocks||-0.15$ (withholding tax from US or foreign jurisdiction) Creditable||0.85$|
|3- Holding US listed ETFs that invest in International stocks||-0.15$ (withholding tax from foreign jurisdiction) Non creditable -0.13 (withholding tax from US) Creditable||0.72$|
The chart is designed for illustrative purposes only and is subject to change. Please consult a tax specialist for more information.
Fixed income will dominate the portfolio at 60% or more (with the exception of Horizons’). Meaning your investments will be mostly in Bonds. Bonds are much safer than stocks but they don’t usually offer much return. This portfolio is perfect for some one whose financial objective is short term or who is risk averse. Your portfolio will still have between 20-40% exposure to stocks which allows for some modest growth with a moderate risk overall.
A balanced portfolio is an investment that combines stocks and bonds. In general, 60% will be invested in the stock market. While the remainder (40%) will be invested in fixed income investments. This portfolio seeks to combine both growth potential by holding stocks and the safety associated with holding bonds.
A growth fund is a diversified portfolio of stocks that has capital appreciation as its primary goal. This is ideal for investors who have a long term objective such as building a retirement fund. The fund will invest at least 80% in Stocks. Generally for these type of funds, providing a dividend income is a secondary objective.
A dividend yield is an annual percentage calculating the amount received by the investor for a year. It does not take into account capital loss or appreciation. So, you could own an investment that has a positive dividend yield and a negative performance.
All in one ETFs
By purchasing an all-in-one ETF (also called an ‘all-in-one ETF’, the investor can be exposed to different types of assets at the same time. In fact, he becomes the holder of a portfolio made up of both income. fixed and stocks with a predetermined allocation. And furthermore, he does not need to rebalance his portfolio because the ETF manager does it for him. In short, it is simply a question of choosing an ETF with the desired allocation and keep it.
Expected investment outcome with covered call ETFs
In a robust bull market, where the price of the underlying stock rises above the strike price plus the option premium, the covered call writer will underperform.
Due to earning the option premium, the covered call writer can normally anticipate to outperform merely holding the stock in flat, decreasing, and mildly rising markets.
|Covered call strategy|
|Bull Market||lags in terms of|
|Modest Bull Market||Outperforms the index|
(frequent ups and downs)
|Outperforms the index|
|Beat market||Outperforms the index|
How to select monthly dividend stocks?
Look at the payout ratio
The dividend payout ratio is the amount of dividend distributed by a company divided by the total earnings. For example, a company makes a profit of $ 100 and pays $ 40 in dividends. Its payout ratio is 40%.
If the ratio is high, the company pays almost all of its profits in dividends. There will be little money left in the coffers to innovate or expand to new markets;
It is preferable to invest in a company where the dividend payout ratio is low or medium. The reasoning is that these companies will have money set aside to invest in new projects and thus create growth;
Another variation of payout ratio (Trailing div / Earnings) is the payout ratio to cash (Div / Free cash flows). Earnings can be easily manipulated, so analysts use the payout ratio to cash to assess the safety of dividends better. The website ‘Marketbeat‘ provides the payout ratio to cash for Canadian stocks.
Focus on total return
When one wishes to invest in a dividend-paying stock, it is essential to pay attention to its performance and growth potential. The most common mistake is to invest in stocks with high dividend yields. This strategy is risky. Here’s why :
• A stock can pay a high dividend yield, but is it sustainable? Some companies have a payout ratio that is close to and even exceeds 100%. They manage to post desirable dividend yields, but if we look at the growth prospects, it’s almost nil;
• Investors sometimes shun companies for lack of growth potential or actual risk of lower revenues in the future. These companies experience a drop in the price of their shares, and this causes the dividend yield to become abnormally high. Sooner or later, these businesses will have to cut their dividend.