# Are dividends in a tfsa taxable?



## BigBoogie (Jun 7, 2013)

Just got a nice one, was a little upset when I saw they taxed it. Was totally not expecting it. I'm guessing because the holding is foreign?


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## andrewf (Mar 1, 2010)

There's 15% withholding tax applied to foreign dividends in a TFSA. This is because the TFSA is not covered by the tax treaty between Canada and the US. Thus, US distribution-paying assets are better held in an RRSP than TFSA.


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## Toronto.gal (Jan 8, 2010)

BigBoogie said:


> Just got a nice one, was a little upset when I saw they taxed it. Was totally not expecting it. I'm guessing because the holding is foreign?


It's 15% for US & most foreign stocks, but for some ADRs [non-US foreign stocks], it may be more, for example, Spain = 21%. 

There are also some ADRs that pay the quoted dividend in full, hence giving you the impression that the withholding taxes were $0, when in fact, it just means that the taxes were withheld at source, so for that reason you would not see the tax breakdown in your account.

Note also that as TFSAs are already tax-free, you can't claim foreign tax credits, but don't feel too disappointed; just think that in an RRSP account, while you would not have paid the div. taxes, the account is eventually fully taxed at your tax-rate upon withdrawal. 

I would focus more on the quality of the investment as keep in mind that capital losses are not tax-deductible in an already tax-free account. Be careful with stocks paying a high dividend yield. 

http://taxtips.ca/tfsa/taxespayable.htm


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## supperfly17 (Apr 18, 2012)

Toronto.gal said:


> I would focus more on the quality of the investment as keep in mind that capital losses are not tax-deductible in an already tax-free account. Be careful with stocks paying a high dividend yield.
> 
> http://taxtips.ca/tfsa/taxespayable.htm


I am always curious about this. Would one not want to be purchasing stocks with a high yield? The more yield the better, correct?

Or does it just simply mean stocks with high yield have a greater chance of having the dividend cut?


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## andrewf (Mar 1, 2010)

You should avoid picking stocks on the basis of yield. It tells you next to nothing about the underlying health of the business.


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## My Own Advisor (Sep 24, 2012)

Agreed with T.gal and andrewf, good investments trump my thirst for yield.


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## Toronto.gal (Jan 8, 2010)

supperfly17 said:


> 1. The more yield the better, correct?
> 2. Or does it just simply mean stocks with high yield have a greater chance of having the dividend cut?


*1.* No, that's not correct, you need to focus on the key fundamentals. 

Would you feel a sense of security if a $30 stock was paying you $4 annual dividend, ie: 13.3% yield [$4 : $30]? I would suggest you read up on the subject to make sure you won't get burned.

*2.* Falling stock price is the biggest danger. You wouldn't want a TFSA investment to drop significantly for reasons mentioned upthread.


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## lonewolf (Jun 12, 2012)

Toronto. gal

I like your signature. Is everyone able to have a signature ? I was going to make one but did not see it on my profile. Does not matter for now I forgot what I was going to say.


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## Retired Peasant (Apr 22, 2013)

If you remember what you want to say, it's under Settings, not Profile.


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## BigBoogie (Jun 7, 2013)

Thank you


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## praire_guy (Sep 8, 2011)

andrewf said:


> You should avoid picking stocks on the basis of yield. It tells you next to nothing about the underlying health of the business.


You should avoid picking stocks on the basis of yield ALONE. 

yield CAN tell you a few things or at the least send up a flag for further research. I.e a very high yield specifically way higher than its peers can and often does signal a dividend cut.


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## lonewolf (Jun 12, 2012)

Retired Peasant

thank you


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## Toronto.gal (Jan 8, 2010)

lonewolf said:


> Is everyone able to have a signature?


Did you find it yet? Under 'My Settings', you'll see 'Edit Signature'. Thinking of a planet quote? :wink:


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## james4beach (Nov 15, 2012)

praire_guy said:


> You should avoid picking stocks on the basis of yield ALONE.
> 
> yield CAN tell you a few things or at the least send up a flag for further research. I.e a very high yield specifically way higher than its peers can and often does signal a dividend cut.


Right, yield alone is not enough of a screening tool. However it turns out that picking the highest yielding stocks with low payout ratios can result in out-performing stocks. I've seen lots of evidence supporting this, including page 12 of:
http://www.factset.com/websitefiles/PDFs/dividend/dividend_3.28.13/at_download/file

The best results are stocks with: payout ratios below 50% + dividend increases over time + highest dividend yields

Mind you, the same research also shows that as a whole, stocks that pay NO dividends outperform the average dividend paying stock. So in a total return sense, you're best off going with stocks that pay zero dividends. But if you insist on getting dividends, you'll have to carefully pick the above criteria to get the out-performance.


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## lonewolf (Jun 12, 2012)

Toronto.gal said:


> Did you find it yet? Under 'My Settings', you'll see 'Edit Signature'. Thinking of a planet quote? :wink:


Toronto Gal

Thanks for the idea, I will challenge the mental content of some minds out there & make them wonder if they have contradiction within thier thinking. The goal of the qoute is to better understand the power of wanting to be accepted has on ones mental content over accepting the truth as thier friend. Truth allows one to become powerfull thinker like Galileo who used a telescope of reason & logic. 


In the Christan & Hebrew holly books (& in shakespeares Plays) The word "star" usually refures to one of the "wondering stars" which we would call "planets" in the English language. Remember that the bible was written noone knew that the brightest stars in the night sky were really visible planets Mercury, Venus, Mars, Jupitor & Saturn.

Now who is right those on Sunday that says astrology is evil or WD Gan that said the bible was the best book on astrology ever written ? ( read signature @ bottom)


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## tombiosis (Dec 18, 2010)

"and the meek shall inherit the earth" (Rush, 2112)


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## andrewf (Mar 1, 2010)

Believe it or not, but there are people out there who are utterly unpersuaded by bible quotes.


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## Echo (Apr 1, 2011)

james4beach said:


> The best results are stocks with: payout ratios below 50% + dividend increases over time + highest dividend yields
> 
> Mind you, the same research also shows that as a whole, stocks that pay NO dividends outperform the average dividend paying stock. So in a total return sense, you're best off going with stocks that pay zero dividends. But if you insist on getting dividends, you'll have to carefully pick the above criteria to get the out-performance.


That's interesting. The research I've seen shows the opposite - that non-dividend paying stocks have performed significantly worse than dividend paying stocks. Here's one study (of course, they're trying to sell you a dividend fund at the end, so perhaps the results have been skewed in their favour) - https://server.capgroup.com/capgrou...ghts/Capitals_Views/VP_Dividends_Mar-2012.pdf


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## lonewolf (Jun 12, 2012)

cycles

There will be times when non-dividend stocks perform better then dividend paying stocks & times they perform worse.


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## james4beach (Nov 15, 2012)

Echo said:


> That's interesting. The research I've seen shows the opposite - that non-dividend paying stocks have performed significantly worse than dividend paying stocks. Here's one study (of course, they're trying to sell you a dividend fund at the end, so perhaps the results have been skewed in their favour) - https://server.capgroup.com/capgrou...ghts/Capitals_Views/VP_Dividends_Mar-2012.pdf


Which part of that study says that? (That divided paying stocks outperform non-dividend payers)?

If you're talking about the chart on page 4, it's a misleading graph. It shows non-dividend paying stocks at 1.6% which is all of them lumped together. But you don't have a comparison figure of "all dividend paying stocks"... instead they have isolated certain sub-groups of dividend paying stocks, but they're not showing you a total across all dividend paying stocks. There is no apples to apples comparison of performance.

Here are three studies that show that dividend payers (as a total group) underperform non-dividend payers

1. http://www.factset.com/websitefiles/PDFs/dividend/dividend_3.28.13
Page 13 is pretty clear. Looking at past 20 years, the S&P 500 is split into dividend stocks and non-dividend stocks. The dividend stocks seem to chronically under-perform the S&P 500 with very few exceptions. Non-dividend stocks outperform. Plus they've omitted Apple, which is interesting, because Apple was a non dividend payer prior to its 2012 peak. This means that with Apple included, the non-dividend stocks do even better and since it pays dividends since 2012, the dividend payers would perform even worse!

2. Care of CanadianCapitalist, http://www.tweedy.com/resources/library_docs/papers/TheHighDivAdvantageStudyFUNDweb.pdf
The gem is buried deep in this study. After all the hoopla about high dividend yields, you get to a vital chart on page 13, Exhibit 2: Dividend Yield and Payout Ratio. The S&P 500 line is grey, and the "No Dividend" line is black. The black line is well above the grey line; "no dividend" stocks outperform the market. Again they're trying to dodge the issue by not including a line for "all dividend stocks". Instead they show you a few lines that have great performance. But think about it. If the S&P 500 consists of dividend stocks + nondividend stocks, and the nondividend stocks outperformed the S&P 500, that logically means that dividend stocks underperformed.

3. http://seekingalpha.com/article/1041571-higher-dividend-stocks-are-inferior
Another study, just comparing ETF returns. It concludes that the broad market outperforms dividend paying stocks, in total return.


Given all this, I have totally cooled off on the idea of dividend paying stocks. Yes, SOME categories of dividend stocks will outperform everything -- if you very carefully screen them for certain metrics. But how about the average dividend stock, that is, dividend paying stocks as a whole? They under-perform the broad market.

So cutting to the simplest solution, it is simply to hold the broad index. This is expected to have the best total return. If you want to improve on it a bit? Then hold non-dividend paying stocks, because as an overall group they outperform the broad index.


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## Echo (Apr 1, 2011)

@james4beach - thanks for the links (damn you, Seeking Alpha - show me the full article!). It seems that if the 'dividend cutters' category were to be lumped back in with the other dividend payers then that would drag down the overall returns of dividend stocks. I suppose one could mitigate that risk by avoiding stocks with high yield, high payout ratio.


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## james4beach (Nov 15, 2012)

Echo said:


> @james4beach - thanks for the links (damn you, Seeking Alpha - show me the full article!). It seems that if the 'dividend cutters' category were to be lumped back in with the other dividend payers then that would drag down the overall returns of dividend stocks. I suppose one could mitigate that risk by avoiding stocks with high yield, high payout ratio.


Certainly should avoid the high payout ratios. But surprisingly, the first two studies show that high yield isn't a bad thing.

The best returns seem to come from stocks with: low payout ratio, dividend increases, and high dividend yield (which surprised me).


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## rknigh2 (Jun 5, 2012)

I've seen a lot of people buying up mlp's. Holding high yielding US mlp's in the tfsa will get you hit with a 35% withholding tax.


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## CanadianCapitalist (Mar 31, 2009)

james4beach said:


> Which part of that study says that? (That divided paying stocks outperform non-dividend payers)?
> 
> If you're talking about the chart on page 4, it's a misleading graph. It shows non-dividend paying stocks at 1.6% which is all of them lumped together. But you don't have a comparison figure of "all dividend paying stocks"... instead they have isolated certain sub-groups of dividend paying stocks, but they're not showing you a total across all dividend paying stocks. There is no apples to apples comparison of performance.


S&P total returns for the 1982 to 2011 time period was 8.2 percent. Dividend non-payers returned you 1.6 percent. Ergo, dividend payers had better returns for that time period. We discussed this in another thread. Financial research tells us that one can obtain a value premium and small-cap premium by investing in value and small-cap stocks. Dividend stocks are weak value stocks. Non-dividend stocks, especially in the S&P 500 tend to be smaller companies which tend to outperform larger companies albeit at higher risk. When you are comparing dividend payers with non-dividend payers in the S&P 500, you are kind of pitting one premium against the other. 

It's possible you actually have stumbled onto something significant in comparing dividend payers and non-dividend payers. To accept it, one would need a lot more data, not just one or two time periods. One way to test your theory would be to look into returns from the two groups for a whole bunch of 5-, 10-, 15-, 20- etc. year periods. FWIW, I doubt there is anything special about whether a company pays a dividend or not. Dividends are simply a product of what a company decides to do with its earnings. I'll be really surprised if you discover there is something fundamental about them.



james4beach said:


> So cutting to the simplest solution, it is simply to hold the broad index. This is expected to have the best total return. If you want to improve on it a bit? Then hold non-dividend paying stocks, because as an overall group they outperform the broad index.


I agree with the first part. I disagree with the second because even assuming your assertions are true (non-dividend payers outperform dividend payers), there is no way, AFAIK of investing in this thesis. Why not take advantage of financial research instead and add something like small-cap value stocks, which is investable through many ETFs.


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## james4beach (Nov 15, 2012)

CanadianCapitalist said:


> S&P total returns for the 1982 to 2011 time period was 8.2 percent. Dividend non-payers returned you 1.6 percent. Ergo, dividend payers had better returns for that time period. We discussed this in another thread.


OK good point. Yes for that period, the non-payers definitely underperformed the broad market (I didn't quite grasp that when I looked at those numbers). But I still wonder why FactSet's sheet shows such an opposite picture. Their graphs are based on rolling 1 month returns, so their graph is not sensitive at all to the start date. And then we have that Tweedy Browne report you linked... which unless I'm mistaken shows a significant advantage of the non-dividend payers.

But you're right, this is going to vary with time period and there may indeed be a midcap/smallcap performance advantage. I still want to dig into it further but my initial excitement over this is fading now.



> I agree with the first part. I disagree with the second because even assuming your assertions are true (non-dividend payers outperform dividend payers), there is no way, AFAIK of investing in this thesis. Why not take advantage of financial research instead and add something like small-cap value stocks, which is investable through many ETFs.


OK fair points and I totally agree with the above statement. In reality, with all the work all of this details, I will probably just get XIU or ZCN and the S&P 500


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## underemployedactor (Oct 22, 2011)

andrewf said:


> Believe it or not, but there are people out there who are utterly unpersuaded by bible quotes.


Agree. But Tombiosis was sardonically quoting the Rush song, not the quote from the book of Matthew.
James4 - thanks for all the links. I don't always agree with your conclusions, but your links are very thought provoking.
Lonewolf - not to be nasty, but I find it surprising that you have plowed through Shakespeare's plays and Christian and Hebrew "holly" books and have still failed to learn to spell. Sorry, and not to be nasty, but a "wondering star" whatever that is, would be an entirely different thing from a "wandering star" which is, I assume, what you meant. So poor spelling is not just an annoying distraction, but can utterly distort the meaning you are trying to convey.


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