When we kicked off this month, I’d discussed a major mistake that TFSA investors need to avoid as we look ahead to the next decade. In the linked article, I focused on investors who were using their TFSA primarily as a cash account. This has become common over the past decade, and it has the potential to rob investors of huge tax-free gains in the long run.
Today, I want to zero in on a mistake that TFSA investors can stumble into if they are not careful.
Investing in U.S. dividend stocks
It is understandably tempting for investors to target stocks listed on U.S. indexes. Not only are there many times more options south of the border, but there is great depth in income-generating equities. As it stands today, the TSX index lacks a dividend king. A dividend king is a stock that has achieved at least 50 consecutive years of dividend growth.
By contrast, there is an impressive stable of stocks in the U.S. that have met these criteria. Altria, Johnson & Johnson, and Lowe’s Companies are just three examples of dividend kings. That kind of track record is tempting for income investors, which is why some Canadians may want to stash U.S. dividend stocks in their TFSAs.
Unfortunately for Canadians, the U.S. Internal Revenue Service (IRS) levies a withholding tax of 30% on dividends paid to Canadian resident investors. This applies to U.S. stocks and to mutual funds and/or exchange-traded funds (ETFs) that own U.S. stocks. Fortunately, this can be reduced to 15% if investors submit a W-8BEN or W-9 form. Still, even if the rate is slashed in half, this is a hefty toll that can really add up in the long term.
For investors who are still committed to pursuing income-generating equities in their TFSAs, there are plenty of high-quality options in the Canadian market.
Look for alternatives on the TSX
The TSX may lack a dividend king, but there is one stock that is on the cusp of claiming its crown. Fortis is one of the largest utilities operating in Canada. These stocks have been great targets for income investors in 2019. The rout in bond yields has put a spotlight back on utilities because of their yield and stability. Fortis is an elite choice for investors on the TSX.
Shares of Fortis have climbed 21% in 2019 as of close on November 20. The stock last hiked its quarterly dividend by 6.1% to $0.4775 per share. This represented the 46th consecutive year of dividend increases for Fortis. Its capital-expenditure plan is set to give a boost to its rate base, which will, in turn, support dividend increases into the middle of the next decade.
For investors on the hunt for a higher yield, there is the energy infrastructure giant Enbridge. It has achieved nearly 25 consecutive years of dividend growth. Currently, the stock offers a quarterly dividend payout of $0.738 per share, representing a 5.8% yield.
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Fool contributor Ambrose O'Callaghan has no position in any of the stocks mentioned. David Gardner owns shares of Lowe's. The Motley Fool owns shares of and recommends Enbridge. The Motley Fool recommends Johnson & Johnson and Lowe's.