# Couch potato with Dividends



## none (Jan 15, 2013)

I'm a relatively new couch potato and just in the process of moving all my accounts over to TDW. Since I've never done anything like this before I'm going to go with the 'complete couch potato' but I would like to add a bit of a dividend component due to my low income tax circumstances.

Here is the 'complete couch potato' for those unfamiliar: http://canadiancouchpotato.com/model-portfolios/

This portfolio is really all the average investor will ever need. The weighted MER of this portfolio is 0.27%.

Canadian equity	20% BMO S&P/TSX Capped Composite (ZCN)
US equity	15% Vanguard Total Stock Market (VTI)
International equity	15% Vanguard Total International Stock (VXUS)
Real estate investment trusts	10% BMO Equal Weight REITs (ZRE)
Real return bonds	10% iShares DEX Real Return Bond (XRB)
Canadian bonds	30% iShares DEX Universe Bond (XBB)

Because we have about 200K to invest of which about 80K is in not registered and because I am in the lowest tax bracket I would like to add a dividend fund to this make up. Also, I think we can tolerate the risk and reduce the bond percentage to 30%.

Is there a ETF that anyone would suggest? For ease of management it would be nice to have one that uses DRIP but for these, does each monthly dividend still act as a capital gain? If so, this is what I'm looking for because i am negatively taxes on dividends making this more tax efficient than a TSFA (assuming no growth in the fund itself of course).

I was thinking either:
1) XDV: http://ca.ishares.com/product_info/fund/overview/XDV.htm
2) VDY: FTSE Canadian High Dividend Yield Index ETF: https://www.vanguardcanada.ca/individual/etfs/etfs-detail-overview.htm?portId=9560

Any suggestions? Thanks for the help.


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## Squash500 (May 16, 2009)

Hi None...first of all I'm not a licensed advisor etc so please take my comments with a grain of salt---lol. First of all...it's difficult to give specific answers because of a few reasons. You say you're in the lowest tax bracket. Will that change in the future? You also say "we" so I presume your married etc. Also if you continue to remain in the lowest tax bracket you IMHO should focus on maximizing your TFSA's and not worrying so much about your RRSP's. Also the asset allocation of your portfolio will also depend on how old you are.

I read an article in the financial post last Saturday that said because canadian 10 year government bonds are only yielding 2% that alot of advisors are now putting their clients into portfolios with an 100% equity component. This 100% is made up of alot of dividend stocks and preferred shares. The advisor who was quoted in the article who does this was Norman Levine of Portfolio asset management.

If I were you I would reduce your bond percentage to below 30%. Also why include the XRB at all?

Personally I'm a big fan of the XDV. At TDW....you can synthetic Drip the XDV every month for additional shares at no charge. The monthly dividend will only act as a capital gain if the share price of the XDV goes up. The capital gain has nothing to do with the XDV distribution which is totally determined by ishares...Blackrock. The XDV monthly distribution will show up on your tax return in your non-registered account as eligible dividends and not capital gains.

Where as if you sell your XDV shares for a profit then that would be considered a capital gain.

I personally find that it's almost impossible to give anyone on this site specific advice because they're so many variables that we don't know about in the poster's life and nor should we.


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## none (Jan 15, 2013)

Thanks for the feedback! I know it can be difficult to give specific advice. Fro example, I neglected to mention that both of our TFSAs are maxed out. Really, it's between putting more into our RRSPs (which doesn't make sense for me, actually I'm considering withdrawing money from my RRSP and putting it back in through a spousal plan through my wife who is in a high tax bracket). Having said that - I'm HOPING that I'll have a job paying 70K+ in the next year or so but who knows.

I think going all equity is a little much for me at this point. The reason that I'm going to go 30% is based on this article:
http://canadiancouchpotato.com/2013/01/21/does-a-6040-portfolio-still-make-sense/



So, the dividends that are re-invested through XDV are taxed as dividends correct? I'm in a -6% bracket for dividends which is my motivation.

Thanks!


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## Squash500 (May 16, 2009)

none said:


> Thanks for the feedback! I know it can be difficult to give specific advice. Fro example, I neglected to mention that both of our TFSAs are maxed out. Really, it's between putting more into our RRSPs (which doesn't make sense for me, actually I'm considering withdrawing money from my RRSP and putting it back in through a spousal plan through my wife who is in a high tax bracket). Having said that - I'm HOPING that I'll have a job paying 70K+ in the next year or so but who knows.
> 
> I think going all equity is a little much for me at this point. The reason that I'm going to go 30% is based on this article:
> http://canadiancouchpotato.com/2013/01/21/does-a-6040-portfolio-still-make-sense/


Hi again None...That's excellent that both of your TFSA's are already maxed out. IMHO your couch potato portfolio seems sound and as a result you'll be saving an absolute fortune on financial advisors in the years to come. However if I was in your position...I would invest a couple of hundred dollars and have your taxes done by an accountant for at least one year. He/she will be able to tell you and your wife about such complicated things as spousal plans for RRSP's etc. IMHO it would be money well spent.

Maybe 30% in the XBB would make sense but IMHO the XRB seems unnecessary but that's just my opinion. Yes I believe that the dividends that are re-invested through the XDV are totally taxed as eligible dividends. None.. you can either take these monthly XDV distributions in additional shares or in cash.


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## none (Jan 15, 2013)

We do have an accountant - but I still like to know what's going on - and I'm kind of doing this part on my own. One thing that I have found by moving back to Canada is that the CRA is an absolute gong-show. Although not cheap, having a good accountant lets me sleep better at night.

I take no credit for my couch potato - it's all from the canadiancouchpotato website (standing on the shoulders of giants right? )

So just to ensure that I'm understanding this correctly, even though I have the dividends automatically re-invested, I am still charged the dividend gain for each monthly pay out - presumably I would get some sort of form from ishares each Feb or so detailing what my gain (hopefully!) would be?

Keeping track of the bought in share price through a DRIP sounds like a bit of a hassle but I guess as long as it's tracked and recalculated on a spreadsheet it shouldn't be too bad.

Thanks for all the help, I really appreciate it.


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## Squash500 (May 16, 2009)

none said:


> We do have an accountant - but I still like to know what's going on - and I'm kind of doing this part on my own. One thing that I have found by moving back to Canada is that the CRA is an absolute gong-show. Although not cheap, having a good accountant lets me sleep better at night.
> 
> I take no credit for my couch potato - it's all from the canadiancouchpotato website (standing on the shoulders of giants right? )
> 
> ...


Hi again None...glad to help. I'm just looking at the TD Waterhouse Valuable Tax information for 2012 as I type out this reply. If you invest in the XDV (for example) then next year you'll get a T3 (Trust units) trading summary that will have all your ETF buy and sells including XDV monthly share distributions etc. I'm personally not very good with spreadsheets but I think you'll have to track your own ACB (adjusted cost base) or in my case my Accountant keeps track of my ACB for me. I just give my accountant my T 3's every year and let him deal with it---LOL.

This year (2012 tax year) the T3 arrives by mail between March 1,2013 and April 2, 2013.....or you could also download it using e services. When you sign up with TDW they'll give you a choice if you want to receive your transaction summary and individual transactions through E-services or through regular mail?

None...I'm not sure how Vanguard works with TDW as I just buy ishares ETFS. With the XDV....TDW doesn't charge you each month for putting more shares in your account through monthly XDV distributions. All you have to pay at TDW is a one time fee of $9.99 to buy the XDV in the first place.


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## none (Jan 15, 2013)

Thanks! This is extremely helpful.

Everyone, it seems, is talking about Preferred shares.

What do you think of HPR Horizons Active Preferred Share ETF?

Or perhaps I'm getting into the personal preference stage here and it doesn't really matter. Thanks again.


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## Squash500 (May 16, 2009)

none said:


> Thanks! This is extremely helpful.
> 
> Everyone, it seems, is talking about Preferred shares.
> 
> ...


 Your welcome none....I own the CPD. This preferred share ETF has about 1.3 Billion in Assets. If you go on ishares.ca you'll find the CPD. In this low interest environment rate the CPD is doing pretty well. The income of preferred shares is all in eligible dividends which are eligible for the canadian dividend tax credit. I've never heard of the HPR but I'll check it out.

Preferred shares ETFS are an alternative to Bond ETFS....for at least apart of an investors fixed income portfolio.


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## gibor365 (Apr 1, 2011)

I personally don't like to much Horizons ETF. From preferred shares ETF, I like XPF. The only problem that because it consistes 50% of PPF, when you hold it in registered account or TFSA, you pay hidden 7.5% dividend withholding tax. However, PPF looks like one of the best preferred ETF, so for TFSA maybe a good idea to buy 50% PPF and 50% canadian ETF like CPD or ZPR. Thus you take full advantage of distributions. What do you think?


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## none (Jan 15, 2013)

Thanks, I think that's what I'll do. I think I'll reduce some XBB to 20% of my portfolio and add 10% of CPD (DRIP) to take advantage of the dividend credit in my non-registered account - depending on how the money falls out (I'm managing 2 RRSPs, 2 TFSA and one cash account - total about 200K). Balancing between the 5 accounts can get a little tricky. Actually the coach potato is even more complicated, I plan on using some TD e-series funds when I need to span accounts some. I don't think it will be too difficult to manage once things are set up but the first time may be a little tricky.

ZPR looks to be a solid choice as well. - thanks gibor.

Thanks!


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## Murph (Sep 9, 2009)

I actually own BMO's dividend fund (ZDV), really happy with it, low MER and nice yield. I was considering VDY but it seems a little overexposed to financials (59% of assets) with 12 % of assets in RY alone.


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## none (Jan 15, 2013)

Murph said:


> I actually own BMO's dividend fund (ZDV), really happy with it, low MER and nice yield. I was considering VDY but it seems a little overexposed to financials (59% of assets) with 12 % of assets in RY alone.


I like it (ZDV). Lower MER compared to the others. thanks!


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## gibor365 (Apr 1, 2011)

none said:


> - thanks gibor.
> 
> Thanks!


Sorry, in my post I meant PFF (iShares S&P U.S. Preferred Stock Index Fund) and not PPF


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## gibor365 (Apr 1, 2011)

Now-days there are too many article that Canadian or US bonds ETF are bad. Was wondering if there is a place in your portfolio for Emerging Markets Bonds? For example ZEF BMO Emerging Markets Bond Hedged to CAD Index...YTM after MER about 3.5%
Top 10 holdings are government bonds of:
Korea Rep 7.125 16Apr19 7.99%
Brazil Rep 4.875 22Jan21 7.48%
Mexico 6.05 11Jan40 7.08%
Indonesia 3.75 25Apr22 6.81%
Venezuela 11.95 05Aug31 5.79%
Russia Fed 7.50 31Mar30 5.59%
Argentina 2.50 31Dec38 5.25%
Ukraine 7.95 23Feb21 3.58%
Hungary Rep 6.375 29Mar21 3.51%
Romania Rep 6.75 07Feb22


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## doctrine (Sep 30, 2011)

I'm not an expert in foreign bonds, because it's pretty complicated and rules are different in every country. However, I know for a fact that many countries on that list have defaulted, and many in the last 20 years. Pretty risky, especially for a 3.5% YTM.


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## none (Jan 15, 2013)

gibor said:


> Now-days there are too many article that Canadian or US bonds ETF are bad. Was wondering if there is a place in your portfolio for Emerging Markets Bonds? For example ZEF BMO Emerging Markets Bond Hedged to CAD Index...YTM after MER about 3.5%
> Top 10 holdings are government bonds of:
> Korea Rep 7.125 16Apr19 7.99%
> Brazil Rep 4.875 22Jan21 7.48%
> ...


I'm not really interested in investing in some of those countries. I'm not really into chasing returns at this point - just trying to get my feet wet with index investing and making some smart decisions based on my tax position. Thanks for the advice though.


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## Murph (Sep 9, 2009)

none said:


> I'm not really interested in investing in some of those countries. I'm not really into chasing returns at this point - just trying to get my feet wet with index investing and making some smart decisions based on my tax position. Thanks for the advice though.


I hold some ZEF in my TFSA, it's a small percentage but it does add some diversification. Just remember, however, that it EM bonds don't have the negative correlation to equities that long term treasuries or gold might have...


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## andrewf (Mar 1, 2010)

EM bonds have performed well in the past. Buying them now is a bit of performance chasing. Yields are such that the returns aren't likely to be great, especially after the cost of currency hedging knocks the yield down further.


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## My Own Advisor (Sep 24, 2012)

What is the benefit is investing in foreign bonds? I can see foreign stocks....


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## HaroldCrump (Jun 10, 2009)

My Own Advisor said:


> What is the benefit is investing in foreign bonds?


Currency and sovereign risk diversification.
Assuming you can do it at a reasonably low cost though.

With bonds, you have to decide whether you want currency risk or currency diversification.
They are two sides of the same coin.


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## My Own Advisor (Sep 24, 2012)

Thanks HC.

I guess I prefer to have currency diversification with equities using a long investment horizon.


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