Friday, March 3, 2017

U.S. vs Canadian Market

I know that about 50% of my readership is American and 40% is Canadian. I keep getting questions about the benefits of investing on both sides of the border depending on where you live. The question makes sense regardless if you are North or South of the US Canada border: should you invest in the U.S. market? The answer is yesShould invest in the Canadian market? the answer is yes as well. For the sake of diversification and because both markets are completely different, I think it’s a great opportunity that we can invest on both sides of the border with minimal consideration.

Investing in the U.S. market for 3 reasons

The very first reason why anybody would want to invest in the U.S. stock market is because it is the biggest market in the world. This implies lots of great benefits such as:

  • A highly liquid market (the market value makes sense and it is easy to cash your investment)
  • A transparent market (chances of fraud still exist, but are highly diminished by many regulations in place)
  • A “stable” market (while market volatility is part of any investor pain, the U.S. market is definitely less volatile than emerging markets)
Investing in the biggest world market gives additional security to investors. It comes with the largest choice of companies in the largest number of sectors possible. This is the perfect place to start building your core portfolio.
The second reason to invest in the U.S. stock market is to benefit from international markets’ growth perspectives without having to take additional risk. Companies like Procter & Gamble (PG), Pepsi Co (PEP), Coca-Cola (KO), Johnson & Johnson (JNJ), 3M Co (MMM), Colgate Palmolive (CL), etc. are present in many countries around the world and generate roughly 50% of their revenues overseas.  You can then invest in the U.S. market in companies you know and easily get information while a large part of their revenues comes overseas. This benefit allow you to avoid additional taxes charged on dividends income from international companies, worry about currencies (we will cover this topic later as it deserves a full section) and the difficulties getting timely information you need.
Finally, the third reason to invest in the U.S. market is the pool of high quality dividend paying companies. This is the only market where you can find in 2017;
  • 18 Companies with 50+ years of consecutive dividend increases (Dividend Kings)
  • 50 companies with 25+ years of consecutive dividend increases (Dividend Aristocrats)
  • 272 companies with 10+ years of consecutive dividend increases (Dividend Achievers)
This is like heaven for any dividend growth investor. You obviously can’t count on past performance to guarantee the future (I’m sure you have read this before, right?), but it gives you a very strong start to build your watch list.

Why do you need the Canadian market then?

If you are Canadian, you will obviously invest in your own market for simplicity, the currency factor and tax purposes. However, is there a definite advantage for anybody else to invest in the Canadian market? There is more in this market than you think!
First, there are sectors paying higher dividend yield than anywhere else in the world. Regulations have created two special dividend pools in the financial and telecom sectors. The financial sector includes an elite group of 5 Canadian banks (Royal Bank (RY), TD Bank (TD), ScotiaBank (BNS), CIBC (CM) and BMO (BMO)) paying yields between 3.5% and 5% most of the time. The best part is that Canadians banks have beaten the TSX total return over the past 20 years. The second sector that is also protected by federal regulation is the telecom industry. Telus (T), BCE (BCE) and Rogers Communications (RCI.B) control over 80% of the market in Canada. Barriers to entry are very strong offering a unique opportunity to these companies to pay a strong dividend to their shareholders. All companies mentioned in this paragraph are also trading on the NYSE under similar tickers (Telus is the only exception as it trades under TU on the U.S. market).
Second, the Canadian market also offers great opportunities for income seeking investors in the oil & gas industry along with REITs. Both sectors have been part of the Canadian core economy for several years. The oil & gas sector offers higher volatility, but with additional growth perspectives as well. On the other hand, REITs are quite stable income generating vehicles with limited growth potential. Both industries can serve an interesting place in your portfolio while you look for additional diversification.
If you are Canadian, I think it would be wise to invest 50% of your portfolio in the U.S. market. I personally have 65% of my portfolio invested in the U.S. market. If you are American, I think it would be fair to invest between 10% to 20% of your portfolio across the northern border. This would help increase your dividend yield without adding any more risk.

This article was written by Dividend Monk. If you enjoyed this article, please subscribe to my feed [RSS]

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