Tax-efficient wealth building includes optimizing your income to minimize your taxes. For example, your job’s income and interest income (from bonds or Guaranteed Investment Certificates (GIC)) are taxed at your marginal tax rate.
Canadians with a high tax bracket would benefit from contributing an appropriate amount of their job’s income into their Registered Retirement Savings Plan (RRSP) every year to reduce their income taxes. They can also place GICs in their Tax-Free Savings Account (TFSA) so that no tax will be paid for the interest income earned.
Canadian investors can potentially make more money from stock investing by taking greater risks than investing in GICs and bonds. Particularly, stocks that pay out eligible Canadian dividends are taxed at lower rates in non-registered accounts than interest income because of the dividend tax credit. Here are some top stocks for Canadian retirement investors. Stocks that are good for retirement investors are probably good considerations for general investors, too, because retirement investors are typically more risk averse.
Emera stock
Canadian retirement investors like the stability and predictability of regulated utilities like Emera (TSX: EMA). The regulated utility provides essential services as an electric utility. People need electricity whether the economy is doing well or poorly. So, Emera’s earnings should be resilient through the economic cycle. As a regulated utility, it earns a predictable rate of return on its asset base.
That said, utilities innately have sizeable debt on their balance sheets. As well, they are capital intensive. This might be why the dividend stock has been experiencing greater volatility in a higher interest rate environment.
Emera’s interest expense in 2022 was 16% higher than in 2021, although its leverage ratios didn’t move much. For example, its debt-to-equity ratio was 2.5 times at the end of 2022 versus 2.4 times at the end of 2021. Similarly, with negligible change, Emera ended 2022 with a debt-to-asset ratio of 71% versus 70% at the end of 2021.
In a higher interest rate environment, the stock has pulled back meaningfully by about 19% from its 52-week high. At roughly $51 per share at writing, the stock offers a dividend yield of 5.4%, which retirement investors might hold for income. Notably, the company targets dividend growth of 4-5% per year through 2025. At this recent quotation, analysts believe the stock trades at a discount of close to 15%. So, near-term upside potential of approximately 17% is also in the cards.
Tax savings from capital gains
Only 50% of your capital gains are taxed at your marginal tax rate in your non-registered accounts. We’re talking about capital gains from stock or bond investing. Additionally, before you sell your investments, you won’t get taxed on capital gains. In this sense, capital gains are tax deferred until you sell.
So, Canadian retirement investors should consider quality growth stocks in their retirement portfolios as well. For instance, Alimentation Couche-Tard (TSX: ATD) appears to be trading at a reasonable valuation, and management continues to see lots of opportunities to grow organically and via acquisitions. The global convenience store consolidator has an excellent track record of execution as well as dividend growth.
Management carefully allocates capital investments for network development, commercial programs, maintenance and improvement, and innovation. Over time, this has translated to free cash flow growth, which also led to dividend growth. In the last fiscal year, Couche-Tard only paid out about 15% of its free cash flow as dividends.
In the last decade, the top growth stock delivered annualized price gains of over 20% per year, turning an initial investment of $10,000 into about $54,880 of tax-deferred capital gains if the shares were held in a taxable account! At approximately $66 per share at writing, analysts believe the stock trades at a discount of about 17%. So, it could be a good time to buy shares for long-term capital gains.
