What Self-Directed Investors Should Know: Part 2

Self-directed investors should know how to reduce taxes to maximize their returns by buying companies, such as Apple Inc. (NASDAQ:AAPL), in the appropriate account. What else should you know?

It can be exciting and rewarding to build and manage your own portfolio. However, self-directed investors should keep value and cost in mind to maximize every dollar they invest. They should also know what kind of account to use for investing to minimize taxes and maximize returns.

Value

Investors should never overpay for a stock. Doing so increases the risk and simultaneously lowers your returns. If you’re buying a dividend stock, your initial yield will also be lower if you pay too much.

Look for stocks with a margin of safety. For example, if you want to invest in a technology company right now, Apple Inc. (NASDAQ:AAPL) may be a better choice than Microsoft Corporation (NASDAQ:MSFT) because Apple has a lower multiple of 11.3 compared to Microsoft’s multiple of 19.1. In the medium term Microsoft is expected to grow its earnings by about 10%, while Apple is expected to grow its earnings by about 12%.

Which account to use

High-yield U.S. dividend stocks should be held in an RRSP, so there’s no 15% withholding tax on the foreign dividend. However, be careful not to buy master limited partnerships (MLPs), such as Blackstone Group LP (NYSE:BX), because even if you buy it in an RRSP, rumour has it that there’s a withholding tax of about 39% deducted from their distributions. Additionally, there may not be enough information to file taxes for MLPs.

Capital gains and Canadian-eligible dividends are favourably taxed in a non-registered account. However, if you have room in a TFSA, dividends kept there are tax free.

If you earn interests from bonds, GICs, or savings accounts, you might also consider placing them in a TFSA because interests are fully taxable based on your marginal tax rate.

Real estate investment trusts (REITs) such as H&R Real Estate Investment Trust (TSX:HR.UN) and Artis Real Estate Investment Trust (TSX:AX.UN) can be bought in a TFSA to avoid tax-reporting hassles because their distributions can consist of capital gains, foreign income, dividends, and return of capital.

However, the return of capital portion of REIT distributions reduces the cost basis and is tax deferred if the REIT is held in a non-registered account. Always check a REIT’s corporate website to see what its distributions typically consist of to help you decide which account to hold it in.

Cost

Investors should keep costs in mind. Exchange-traded funds (ETFs) are a low-cost way to diversify as they typically cost around 0.5-1% per year compared to $10 per transaction to buy or sell a stock with your bank. However, other discount brokerages cost less. The ideal scenario is to keep costs low by trading less, only buying quality businesses when they’re priced at a discount, and holding them forever.

Conclusion

The price is what you pay and the value is what you get. So, never overpay for any company. In fact, to improve returns, investors should aim to buy companies with a margin of safety. If it’s a really high-quality company, pay at most a fair value for it.

It’s good to know which accounts you should use to hold assets to minimize taxes and maximize your gains. Investors should use TFSAs, RRSPs, RESPs, and non-registered accounts appropriately for that purpose.

Lastly, investors should aim to reduce costs by trading less. And consider low-cost ETFs as a way to diversify.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Kay Ng owns shares of Apple. David Gardner owns shares of Apple. The Motley Fool owns shares of Apple.

More on Dividend Stocks

woman analyze data
Dividend Stocks

Where’d I’d Invest $9,800 in the TSX Today

For investors looking at places to put their next chunk of cash to work in the Canadian market, here are…

Read more »

Dividend Stocks

This 4.6% Dividend Stock Pays You Cash Every Month!

This dividend stock just received a major upgrade by analysts, making it a great time to buy in bulk!

Read more »

Hourglass and stock price chart
Dividend Stocks

1 Magnificent Financial Services Stock Down 13% to Buy and Hold Forever

This financial services stock is one top stock to buy if you're wanting high income and growth.

Read more »

Stethoscope with dollar shaped cord
Dividend Stocks

The Smartest Blue-Chip Stock to Buy With $3,500 Right Now

There are top stocks and then blue-chip stocks, and this dividend stock is one strong option.

Read more »

A bull and bear face off.
Top TSX Stocks

Where I’d Invest $11,000 in the TSX Today

Looking for some stellar long-term picks? Any of these could be labeled as top picks on the TSX today. Here's…

Read more »

dividend growth for passive income
Dividend Stocks

This Canadian Monthly Income Stock at $12.68 Is a Remarkable Opportunity

Investors could snag stock at a 55% discount, earn 4.1% monthly passive income, and bet on Canada’s housing boom at…

Read more »

Man in fedora smiles into camera
Dividend Stocks

Transform Your Retirement With This 10.75%-Yielding Dividend Knight

Do you want income growth? How about guaranteed income through dividends as it continues to grow year after year?

Read more »

sale discount best price
Dividend Stocks

This Dividend Superstar Paying 12% Monthly Is Too Cheap to Ignore

This yield-focused ETF provides exposure to U.S. healthcare giants and pays high monthly income.

Read more »