diversification

Dividends that Canadians receive from U.S. corporations are subject to a 15% withholding tax. In most cases, however, you get a Canadian income-tax credit to offset that tax. U.S. securities held in an RRSP are not subject to withholding taxes, under terms of the tax treaty between the U.S....

When building your portfolio, it’s crucial to follow our stock investing advice of downplaying stocks that seem to be near-universally recommended by brokers and are getting a lot of favourable media coverage. That’s because, in investing, familiarity can breed excessive feelings of comfort, security and performance. After all, brokers get information from the media, investment journalists spend a lot of time talking to brokers, and company managers listen to both. A feedback loop can develop that spurs high expectations, derails criticism, and leads companies (and their investors) to make devastating mistakes. You may get the feeling that these are can’t-miss investments, and that it’s safe to buy and forget them. That’s exactly the wrong thing to do with these stocks. Our stock investing advice is that your in-the-limelight holdings are the ones you need to watch most closely....

You’ll find our mutual-fund ratings (Aggressive, Conservative or Income) displayed next to every fund we recommend in our Canadian Wealth Advisor newsletter. They’re key to helping us find top-performing funds, including those that are suitable for income investing. (To show you how our system works, we’d like to share one of the income investing fund buys we recently recommended in Canadian Wealth Advisor. Please read on for full details.) Rating mutual funds is more complex than rating individual companies. When we judge a company’s investment quality, we take nine key factors into account....

ZARGON ENERGY TRUST $18.07 (Toronto symbol ZAR.UN; SI Rating: Speculative) (403-264-9992; www.zargon.ca; Units outstanding: 23.0 million; Market cap: $415.4 million) produces oil and gas in Alberta, Manitoba, Saskatchewan and North Dakota. In the three months ended June 30, 2009, Zargon’s production rose 3.0%, to 9,520 barrels of oil equivalent per day (this measurement includes natural gas) from 9,239 barrels. The company’s output is weighted 50% toward natural gas and 50% to oil. This diversification between gas and oil helps cut Zargon’s risk. Despite the higher production, Zargon’s cash flow per share fell 41.3%, to $0.91 from $1.55 a year earlier. Lower oil and gas prices were the reason for the drop....

Some advisors like to use sports or military analogies to describe their investment approach. They see a great stock pick as the equivalent of a touchdown or home run, and a series of them as a successful military campaign. This, however, puts too much emphasis on excitement and glory, and pays too little attention to risk. In contrast, if we had to compare our approach to anything outside the investment business, we’d choose chess. (You can learn more about our value-investing strategy for selecting stocks in our new free report, “Canadian Stock Market Basics: How to Trade Stocks and Make Good Investments in Canada.”)...

Imperial Oil has 25 years worth of oil and gas reserves. But it also owns four refineries, which convert crude oil into gasoline and other fuels. These operations profit when oil prices fall because they pay less for the crude they refine. Imperial also operates 1,900 Esso gas stations. This diversification helps shield the company from volatile oil and gas prices. It also makes Imperial Oil an ideal resource stock for safety-conscious investors. IMPERIAL OIL $40.75 (Toronto symbol IMO; Shares outstanding: 847.6 million; Market cap: $34.5 billion; SI Rating: Average) is Canada’s largest integrated oil company. Imperial earned $0.25 a share in the three months ended June 30, 2009. That was down 80.5% from $1.28 a share a year earlier. Falling oil and natural-gas prices were the main reason for the drop. As well, Imperial’s Cold Lake and 25%-owned Syncrude oil-sands projects were closed for maintenance during the quarter. Revenue fell 40.1%, to $5.3 billion from $8.6 billion....

North West Company Fund, $18.10, symbol NWF.UN on Toronto (Units outstanding: 48.4 million; Market cap: $875.6 million), sells food and everyday products and services through 225 stores, mainly in northern communities across Canada and Alaska. North West also operates stores in remote communities in Hawaii, the South Pacific and the Caribbean. In northern Canada, the company operates the majority of its stores (127) under the Northern banner, followed by Value Centre (30), Giant Tiger (29), Quickstop (14) and NorthMart (7). The fund also owns Crescent MultiFoods, which distributes produce and fresh meat to independent grocery stores in Saskatchewan, Manitoba and northwestern Ontario. North West gets about 63% of its revenue from Canada. In 2002, North West and privately held Giant Tiger signed a 30-year agreement that grants North West the exclusive right to open and operate 72 Giant Tiger stores in western Canada. Ottawa-based Giant Tiger is a 195-store discount chain that sells value-priced clothing, food and seasonal merchandise....

MOODY’S CORP., $18.85, New York symbol MCO, fell nearly 20% this week on new allegations that the company deliberately inflated its ratings on mortgage-backed securities and other complex investments. Bond issuers pay fees to rating agencies like Moody’s to rate their bonds. Some investors have sued the company, accusing it of knowingly issuing higher ratings so it didn’t risk losing these fees. Moody’s has denied the allegations. The stock also came under pressure after billionaire investor Warren Buffett lowered his stake in the company to 16.6% from 20.4% last July. As well, a court recently rejected a long-standing defence used by rating agencies that their opinions are protected under free-speech rights....

When analyzing any new investment, including value stock picks, one key question we ask early on is, “What can this cost us if something goes wrong?” (You can learn more about our value-investing approach to selecting stocks in our new free report, “Canadian Stock Market Basics: How to Trade Stocks and Make Good Investments in Canada.”) There is no simple rule for calculating cost-if-something-goes-wrong. It takes common sense and guesswork. For instance, to determine the cost of a warm winter to a ski-hill operator, we need to see how many ski centres it operates, and if they are in the same or different weather systems. In fact, geographical diversification plays a prime role in most calculations of the cost-if-something-goes-wrong. [ofie_ad]...

SCITI ROCS Trust, $5.46, symbol SCI.UN on Toronto (Units outstanding: 13.0 million; Market cap: $70.9 million), is an investment trust that aims to give investors diversification and tax-efficient monthly distributions through a roughly equally weighted portfolio of income funds that are included in the Scotia Capital Income Trust Index. These funds also have publicly traded shares with a market value of more than $200 million. Bank of Nova Scotia manages the trust through Scotia Capital. SCITI ROCS Trust first issued units at $10, and began trading on the Toronto exchange in May 2005. It is scheduled to wind up on May 18, 2010. The trust has a 0.94% MER, and its monthly distribution yields around 10.6%. For tax efficiency, the trust’s distributions are structured so that they are a return of capital. Amounts received as a return of capital are not taxable, but instead reduce the adjusted cost base of an investor’s units. Taxes are paid at the capital-gains rate, but are not payable until you sell the units....