dividend tax credit

We think investors will profit most — and with the least risk — by buying shares of well-established, dividend-paying companies with strong business prospects. These are companies that have strong positions in a healthy industry. They also have strong management that will make the right moves to remain competitive in a changing marketplace. A company with a long-term record of paying dividends gives investors a measure of safety. Dividends, after all, are much more stable than earnings projections. More important, dividends are impossible to fake — either the company has the cash to pay them or it doesn’t. That’s not to say there won’t be surprises that affect every company in a particular industry. But well-established, dividend-paying stocks have the asset size and financial clout — including solid balance sheets and strong cash flow — to weather market downturns or changing industry conditions....

Economic turmoil over the past few months, and the sharp drop in stock prices, have rekindled investor interest in bonds. This is understandable, since bonds provide steady income streams and a guarantee to repay the principal at maturity. However, bond prices will likely fall over the next few years as interest rates inevitably rise again. Big government budget deficits could spur inflation and push up rates, for example. We continue to recommend that you invest only a small portion of your portfolio in bonds and other fixed income instruments. Instead, you should aim to build a diversified portfolio of well-established companies with long histories of rising dividends....

Canadian banks have recently issued new preferred shares to raise capital. To attract investors in a time of weak stock markets, they’ve issued these preferreds on especially attractive terms. The preferreds pay dividends that give them yields of 6.25% to 6.50%. That’s higher than current Government of Canada long-term bond yields of 4% or so. What’s more, preferred dividends are treated the same for tax purposes as dividends from common shares. So, after-tax yields on preferred shares are actually as much as 43% higher when you factor in the Canadian dividend tax credit....

The Telus Corp. bond is OK to hold if you want to invest in corporate bonds. However, we think you are generally better off investing in Telus’s common shares. The company faces competition from new entrants in the wireless field. However, we think Telus’s strong brands and reputation put it in a position to compete and grow. What’s more, its shares yield 5.5%. Its dividends, unlike bond interest, qualify for the gross-up and dividend tax credit treatment that is normally applicable to dividends from taxable Canadian corporations. So if you hold are in the top tax bracket and you hold Telus shares in your personal taxable account, its 5.5% dividend gives you the same after-tax return as interest of 7.8%. Telus Corp. common shares are a buy....

Starting in 2009, Ottawa’s new Tax-Free Savings Accounts (or TFSAs) will let you earn investment income — including interest, dividends and capital gains — tax free. The new accounts are open to Canadian residents who are at least 18 years old and have filed at least one tax return.

A nice complement to RRSPs

Unlike RRSP contributions, TFSA contributions DON’T give you a tax deduction. But you pay NO tax on TFSA withdrawals. You’ll have a maximum you can contribute each year, regardless of income. It will consist of the sum of these three amounts:...

We think investors will profit most — and with the least risk — by buying shares of well-established, dividend-paying companies with sound business prospects. These are companies that have strong positions in a healthy industry. They also have strong management that will make the right moves to remain competitive in a changing marketplace. A well-established company with a long-term record of dividends provides a measure of safety for investors. Dividends, after all, are much more stable than earnings projections. More important, dividends are impossible to fake — either the company has the cash to pay dividends, or it doesn’t. That’s not to say that there won’t be surprises that affect every company in a particular industry. But well-established, dividend-paying stocks have the asset size and the financial clout — including solid balance sheets and strong cash flow — to weather market downturns or changing industry conditions....

One of our recommended Canadian income trusts is BELL ALIANT REGIONAL COMMUNICATIONS INCOME FUND $28 (Toronto symbol BA.UN; Conservative Growth Portfolio, Utilities sector; Units outstanding: 127 million; Market cap: $3.7 billion; SI Rating: Above average). Bell Aliant is the main provider of telephone services in Atlantic Canada. It also serves rural areas of Ontario and Quebec. BCE Inc. controls about 45% of Bell Aliant. As part of the deal that created the fund in July 2006, Bell Aliant transferred most of its wireless operations to BCE. Without these operations, Bell Aliant has focused on its other growth areas, such as high-speed Internet access. In the first quarter of 2008, a 14.6% rise in high-speed Internet subscribers helped expand Bell Aliant’s overall Internet revenue by 9.8% from a year earlier. Part of that increase was from the recent purchase of the publicly owned telephone system in Kenora, Ontario. Internet services now account for 11% of Bell Aliant’s total revenue....

BCE Inc. recently won a legal ruling against a lawsuit launched by its bondholders to block its $42.75-a-share takeover by a consortium led by the Ontario Teachers’ Pension Plan. BCE has also agreed to alter some of the terms to help speed up the takeover. If the buyout goes through, many of BCE’s investors will want to re-invest their proceeds in other high-yielding telecom stocks. Here are three we see as buys. The influx of former BCE investors should also help push up their stock prices....

Falling interest rates have rekindled investor interest in high-yielding utility stocks, such as these five. All of them have a long history of increasing dividends. Unlike interest payments on bonds, dividends qualify for the dividend tax credit. As well, stocks offer you open-ended returns, so they can give you protection against inflation. Bonds can’t provide this protection, because they are fixed-return investments. We see all five of these utilities as buys for long-term gains and income. TRANSCANADA CORP. $39 (Toronto symbol TRP; Conservative Growth Portfolio, Utilities sector; Shares outstanding: 540 million; Market cap: $21.1 billion; SI Rating: Above average) operates a 59,000-km network of natural gas pipelines in Canada and the United States. This business supplies 70% of its profit. The remaining 30% comes from its electrical power operations. TransCanada aims to cut its reliance on its regulated pipeline business with new growth projects. These include the Keystone pipeline, which will transport crude oil from Alberta’s oil sands to the U.S. Midwest. Initial deliveries should begin in late 2009....

Before letting any investment rule for tax shelters play a role in your retirement investing decisions, make sure it makes sense for you in today’s market. For instance, one long-standing retirement investing rule for tax shelters says you should hold fixed-return investments, like bonds, in your RRSP and hold stocks outside your RRSP. Its rationale is two-fold. First, bonds are safer than stocks because they guarantee repayment of principal....