The TFSA (Tax-Free Savings Account) is arguably one of the better accounts to make use of if you’re looking to get ahead financially. And while there are certainly fewer strings attached with the TFSA, at least compared to other accounts like an RRSP or even the new FHSA, there are some little things to know about if you’re looking to own some of the U.S. names, especially if we’re talking about the ones with outsized dividend yields.
Seeing as there’s no shortage of yield on this side of the border, on the TSX Index, I don’t see why one would prioritize U.S. dividend payers with a TFSA. Ideally, an RRSP would be a better spot for such names. But, either way, the “fine print” would encourage TFSA investors to be very mindful about what kinds of stocks they hold when it comes to tax optimization.
While I’m a firm believer that U.S. stocks are a staple for any Canadian investor’s portfolio, especially given the exposure to next-generation AI data centre buildouts, which is harder to come by on Canada’s stock market, I do think investors should ask themselves where they should hold a U.S. stock. For instance, a heavy yielder, like Verizon (NYSE: VZ), sports a huge 6.5% dividend yield at the time of this writing.
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The U.S. dividend withholding tax could sting more than you think
That’s a large enough payout for investors to be aware of the implications of a 15% U.S. dividend withholding tax, which would skim your dividends if held within a TFSA.
If we’re talking about lower-yielding companies, like the mega-cap tech titans, which tend to have yields well south of the 1% mark, or those more speculative AI hyper-growth stocks that pay no dividend, the TFSA is a fine choice, especially if you’re a long-term holder who believes in the growth story at hand and can get in at a valuation that makes sense.
If, however, we’re talking Verizon, I think investors must evaluate what missing out on that 15% really means and how much it could take away over an extended period of time, especially if you intend to hold for more than a decade. A 15% withholding tax right off the bat would certainly take some of the edge off the TFSA.
When it comes to a name like Verizon, a 15% withholding tax could knock off close to 1% off that annual yield.
The case for buying Canadian when it comes to TFSA dividends
That tax is notable and, over time, could lead to considerable unnecessary loss to dividends when you weigh holding a Canadian stock with a similar yield. I don’t know about you, but shedding off 1% of the yield is a bit of a deal-breaker for me, especially considering names like Enbridge (TSX: ENB), which I find to be a far better company with a better dividend and stronger fundamentals, yield nearly 5%.
In my view, buying the pipeline now or on a dip makes the most sense. If you’re going to get 1% knocked off a U.S. dividend payer anyway, you may as well just go for the domestic play that will live up to the fully tax-free name.
Of course, if you’re keen on U.S. dividend stocks, the RRSP could be your best friend.
