dividend tax credit

Exxon Mobil, $80.34, symbol XOM on New York (Shares outstanding: 4.9 billion; Market cap: $389.3 billion; www.exxonmobil.com), was formed in 1999, following the merger of Exxon and Mobil. It is the world’s largest publicly traded oil company. Exxon Mobil owns 70% of Imperial Oil, symbol IMO on Toronto. In the three months ended March 31, 2011, Exxon Mobil’s earnings jumped to $2.14 a share from $1.33 a year earlier. That beat the consensus estimate of $1.75. The improved performance came from higher oil and natural gas prices, increased refining margins, and record performance from the chemicals division. The company continues to buy back large amounts of its stock. In the latest quarter, it bought back 69 million shares for $5.7 billion....

With today’s low interest rates, investors are paying more attention to dividend yields (a company’s total annual dividends paid per share divided by the current stock price). The best Canadian dividend stocks are responding by doing their best to maintain, or even increase, their payouts. That’s great news for Canadian investors. That’s because dividends are far more reliable than capital gains. More important, a dividend is a sign of investment quality. After all, dividends are impossible to fake — either the company has the cash to pay dividends or it doesn’t. What’s more, dividends can now contribute up to a third of your long-term investment return, without even considering the benefits of the dividend tax credit....

The German government recently announced that it plans to shut down all of its nuclear reactors by 2022. Germany’s decision is the result of anti-nuclear sentiment in the wake of the earthquake and tsunami in Japan, which damaged the reactors at the Fukushima nuclear plant. Right now, nuclear reactors supply about a quarter of Germany’s electric power. It’s doubtful that the country can replace that with wind and solar. What’s more likely is that Germany will have to increase its already large imports of electricity from France, where nuclear already accounts for about 80% of electricity generation....

Investors continue to be concerned about high debt levels in many European countries. That’s especially true of the so-called PIIGS countries (Portugal, Italy, Ireland, Greece and Spain). Portugal recently accepted a 78-billion euro ($107 billion Canadian) bailout package from the European Union and International Monetary Fund. That’s in addition to previous bailouts for Ireland (67 billion euros) and Greece (110 billion euros). Worries persist that Greece, in particular, may not be able to cut its spending enough to avoid defaulting on its debt.

Why we recommend that you focus on Canadian stocks—and limit your European holdings

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BELL ALIANT INC. $27.01 (Toronto symbol BA: Shares outstanding: 227.8 million; Market cap: $6.2 billion; TSINetwork Rating: Above Average; Yield: 7.0%; www.aliant.ca) provides telephone services in Atlantic Canada, as well as rural parts of Ontario and Quebec. BCE Inc. owns 44.1% of Bell Aliant. Bell Aliant converted from an income trust on January 1, 2011. The conversion forces Bell Aliant to pay income taxes. In response, the company changed the rate and frequency of its payout, starting in March 2011. The company now pays quarterly dividends of $0.475 a share. The new annual rate of $1.90 (down from $2.90) now yields 7.0%. That’s still a high payout for a dividend paying stock and high as well compared to similar telephone utilities. As well, investors who hold Bell Aliant outside an RRSP benefit from the dividend tax credit....

If you’ve been following our TSINetwork.ca Daily Updates, or subscribe to one or more of our newsletters and investment services, you’re likely familiar with our three-part investment advice. A key part of that advice is to invest mainly in well-established dividend-paying stocks. (The other two parts are to downplay stocks in the broker/media limelight and spread your money across the five main economic sectors: Manufacturing & Industry; Resources & Commodities; Consumer; Finance; and Utilities.) With today’s low interest rates, investors are paying more attention to dividend yields (a company’s total annual dividends paid per share divided by the current stock price). Dividend paying stocks are responding by doing their best to maintain, or even increase, their payouts....

Davis + Henderson Corp., $19.48, symbol DH on Toronto (Shares outstanding: 59.2 million; Market cap: $1.2 billion; www.dhltd.com), converted from an income trust to a corporation earlier this year. The company is a leading printer of cheques. It also provides chequing and credit-card account management programs, lending-services technology, search and lien-registration services, student-loan processing, and credit-card processing. Davis + Henderson’s clients are mainly financial institutions. Davis + Henderson has cut its dividend since it converted to a corporation: it now pays $1.20 a share (down from the previous distribution of $1.84 a unit). The new rate gives it a 6.1% yield. It also recently paid a $0.15-a-share special dividend. Now that its distributions are dividends, they’re eligible for the dividend tax credit....

ARC RESOURCES LTD. $26.34 (Toronto symbol ARX; Shares outstanding: 275.9 million; Market cap: $7.3 billion; TSINetwork Rating: Speculative; Dividend yield: 4.6%; www.arcresources.com) produces oil and natural gas in western Canada. Its average daily production of 84,686 barrels of oil equivalent (including gas) is weighted 61% to gas and 39% to oil. In the three months ended December 31, 2010, ARC’s revenue rose 18.2%, to $329.3 million from $278.6 million a year earlier. Cash flow per share rose 10.0%, to $0.66 from $0.60. Increased production and higher oil prices pushed up results. The company has $803.6 million of debt. That’s a low 11.0% of its market cap. The shares trade at 8.8 times ARC’s forecast 2011 cash flow of $2.99 a share. It plans to spend $625 million on exploration and development this year, up 5.8% from 2010....

With interest rates still near historic lows, borrowing money to invest continues to look like an attractive investment strategy. That’s especially true if you borrow to buy well-established, dividend-paying stocks. For example, you could pick from the 19 companies we recommend in our Canadian Wealth Advisor newsletter’s Safety-Conscious Stock Portfolio. These investments give you regular dividend income and cash flow to pay the interest on your investment loan. (The Safety-Conscious Stock Portfolio is one of three portfolios Canadian Wealth Advisor offers to conservative and income-seeking investors. The other two are the Index Fund and ETF Portfolio and our Safety-Conscious Income Trust Portfolio. We continually monitor and update all three portfolios.)...

PEYTO EXPLORATION & DEVELOPMENT CORP. $19.61 (Toronto symbol PEY; Shares outstanding: 121.9 million; Market cap: $2.4 billion; TSINetwork Rating: Extra Risk; Dividend yield: 3.7%; www.peyto.com) is the new name of Peyto Energy Trust after it converted to a dividend-paying corporation on December 31, 2010. Peyto produces and explores for oil and natural gas in Alberta. Its average daily production of 32,500 barrels of oil equivalent (including natural gas) is weighted 85% toward gas and 15% to oil. At current production rates, Peyto has proven oil and natural-gas reserves that should last 11 years. Peyto’s cash flow was $0.47 a unit in the three months ended September 30, 2010. That’s up 20.5% from $0.39 a year earlier. The shares trade at 8.6 times the company’s forecast 2011 cash flow of $2.28 a share. Peyto’s long-term debt of $455 million is a reasonable 19% of its $2.4-billion market cap....