You don’t need perfect timing to build wealth with dividends
I followed your pattern Yield Hog Dividend Growth Portfolio for a few years, but only now do I have the money to invest. I consider some of the stocks in your portfolio such as Enbridge Inc. (ENB), BCE Inc. (BCE), Telus Corp. (T), Fortis Inc. (FTS) and Emera Inc. (EMA). However, they are all trading at or near all-time highs. Should I wait for a better entry point to invest in these stocks?
The problem with “waiting for a better entry point” is that it might never come. If the stocks you’re watching continue to rise, you’ll pay more for them, not less. Plus, by waiting for prices to drop, you’ll be missing out on the attractive dividends these companies pay out.
Whether a stock is trading at or near an all-time high doesn’t in itself tell you anything about where the price will go next. Yet many investors tie themselves in knots because their biggest fear is buying right before a pullback and “losing money” on paper.
But would it really be so serious? If you have a long-term investment horizon – which is best if you’re considering stocks – a short-term drop in a stock’s price shouldn’t matter to you. Your goal as an investor should be to identify strong companies that are growing in revenue, earnings and dividends and that will pay you back over the long term, say five years or more. As the old saying goes, it is time in the market, not market timing, that creates wealth.
So instead of trying to pick your entry points perfectly – which no one can consistently do – I suggest you focus on building a well-diversified portfolio, keeping your costs low and reinvesting your dividends to get the most out of capitalization. These are things you can control. Instead of owning individual stocks, you can consider exchange-traded index funds. ETFs will give you instant diversification and help limit the regret and anxiety that some investors feel when the price of an individual company they own drops.
In a recent column, you said that when shares have lost value and are transferred to a tax-free savings account, the investor cannot claim a loss for tax purposes. What about a situation where stocks that have appreciated in value are transferred to a TFSA? Will capital gains taxes be avoided in such situations?
No. Capital gains tax still applies when you transfer a winning action from a non-registered account to a TFSA (or any other registered account). The CRA considers this a deemed disposition, and the tax treatment is the same as if you had sold the shares.
This might seem unfair to some investors. After all, if you transfer losing stocks to a registered account, the capital loss is denied for tax purposes. Similarly, if you sell a losing stock and you – or someone affiliated with you, such as a spouse or a company controlled by you or your spouse – buy back the same stock within 30 days (before or after the date of sale ), this is considered a “superficial loss” and cannot be used for tax purposes.
Unfortunately, the rules are different for capital gains.
As a blog post on adjustedcostbase.ca explains, “If you sell shares and realize a gain, but immediately buy the shares back, can you call that an ‘apparent gain’ and defer the gain? The answer is no: you cannot defer the capital gain and there is no “superficial gain”. The capital gain is taxable immediately in the current tax year, even if the shares are redeemed within 30 days.
I’m about to get quite a large sum of money, part of which I plan to donate to charity. To make a donation in the most tax-efficient way possible, I am thinking of donating shares that I already own and that generate a substantial capital gain. Can I immediately buy more shares of the same company or do I have to wait 30 days?
When you donate listed securities that have appreciated in value, you benefit in three ways. First, you get the satisfaction of helping a good cause. Second, you avoid capital gains tax. Third, you receive a charitable donation receipt for the market value of the securities. The only loser is the Canada Revenue Agency, which receives less tax revenue.
After donating your securities, you are free to buy back shares of the same company. There is no need to wait 30 days. The 30-day waiting period only applies if you sell shares for a capital loss and wish to redeem them without violating the superficial loss rule.
Email your questions to [email protected]. I am not able to answer emails personally but I choose certain questions to answer in my column.
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