It’s always a good idea to diversify your holdings, and many investors turn to the U.S. when they want to expand their investments beyond the Canadian market.
If you hold U.S. shares in your RRSP, the dividends are not taxed, but if you plan to buy U.S. stocks in a non-registered account or in a TFSA, the distributions are subject to a withholding tax, which can be 30% if you don’t fill out the proper paperwork.
For the rich cats out there, you’ll also run into foreign ownership disclosure rules once the U.S. portfolio tops $100,000.
These issues shouldn’t deter investors from buying south of the border. The U.S. market is much more diversified than the Canadian market, and the returns in the U.S. tend to be pretty good over the long haul, but there is some work involved to make sure you don’t lose out on your dividend earnings or run afoul of the CRA.
If all of this seems like a big hassle, you can still get exposure to U.S. growth and benefit from the strong greenback by owning Canadian stocks with significant U.S.-based revenue.
Here are the reasons why I think Toronto-Dominion Bank (TSX:TD)(NYSE:TD) and Fortis Inc. (TSX:FTS) are strong picks.
TD
A decade ago, TD didn’t have much of a U.S. presence, but a massive spending spree along the U.S. east coast from Maine down to Florida has built a very substantial retail operation. In fact, TD now owns more branches south of the border than it does here in Canada.
The American business continues to grow, and restructuring efforts are starting to make the division more efficient. Investors get to participate in the U.S. economic recovery, and the rally in the greenback is providing a nice boost to profits when converted to Canadian dollars.
In fact, U.S. retail earnings came in at $751 million in Q1 2016, up 20% compared with the same period last year. The U.S. operation accounted for roughly a third of total earnings.
TD recently raised its dividend by 8%. The current quarterly payout of $0.55 per share yields 3.9%.
Fortis
Fortis is an electricity and natural gas utility with assets located in Canada, the United States, and the Caribbean. The company has expanded its U.S. footprint in recent years, and the trend looks set to continue.
In 2014 Fortis spent US$4.5 billion to acquire Arizona-based UNS Energy. The integration of the assets went very well, and 40% of the company’s revenue now comes from the United States. Investors are reaping the benefits as Fortis reported record 2015 net earnings of $2.61 per share, up from $1.41 per share in 2014.
Management just announced plans to buy ITC Holdings Corp., the largest independent pure-play transmission company in the United States. This will boost the U.S.-based revenue even more, and investors should see strong dividend growth as a result.
The company raised its quarterly payout by 10% to $0.375 per share late last year. Fortis expects to increase the dividend by 6% annually through 2020. The current distribution provides a yield of 3.9%.
Fortis has raised its dividend every year for more than four decades.
