Friday, 31 January 2014

How does RBC's new Canadian Dividend ETF compare?

The ETF market in Canada took another step towards greater competition this month with RBC's launch of five new equity dividend-oriented ETFs, covering Canada, the USA (a US dollar version and a Canadian dollar hedged version) and developed countries (EAFE in both a US dollar and Canadian dollar hedged version).  Today we'll compare the ETF for Canadian equities, the RBC Quant Canadian Dividend Leaders ETF (TSX: RCD), which started trading January 15, 2014, with its competitors. We'll also see how these ETFs are faring against each other and the broader Toronto Stock Exchange.

RBC Quant Canadian Dividend Leaders ETF
Our comparison table below shows the numbers that lead us to say that RBC's new ETF has:
  • Low MER - At 0.39% maximum management fees (it isn't clear from the prospectus whether the cap on fees means only the management fee only or all the fund expenses as well, like legal, administrative, trading etc which, if not capped, might mean MER around 0.45%), this is second lowest to Vanguard's ETF of 0.35%.
  • Fairly conservative dividend seeking - This ETF does not look to be chasing the highest yielding stocks - e.g. only 2% of its portfolio yields more than 8%. It also has about the same proportion of companies that have cut or not increased their dividend as the TSX, as represented by two market benchmark ETFs, the iShares S&P TSX 60 (TSX: XIU) and the iShares S&P TSX Capped Composite (XIC). However, RCD is not entirely conservative since it has a fairly high proportion of companies with high dividend payouts (more than 90% of cash flow) and with dividends greater than trailing twelve month earnings. 
  • Low individual company concentration - Despite not having an explicit cap on concentration, the portfolio as of now is spread out - the top 10 stocks make up only 31% of the total value of holdings, which is at the low end of the spectrum.
  • Similar company size to the TSX Composite - It is among the closest of the ETFs to the benchmark XIC in terms of the average market cap of its holdings. 
  • High concentration in financials and energy - Offsetting somewhat the good risk spreading across companies, there is still a somewhat uncomfortably high proportion of 70% of holdings in just two sectors. Only Vanguard's FTSE Canadian High Dividend Yield Index ETF (VDY) has a higher sector concentration.
The other Canadian dividend ETFs

Dividend ETFs - Portfolio Characteristics

Dividend ETFs - Performance

Dividend ETF performance is impressive but surprising
  • Total return out-stripping TSX by a lot - Over the year 2013, all but one (BMO's ZDV) of the dividend ETFs outperformed both the large cap XIU or the Composite XIC, most by 3% to 7%. A lot of the return came from capital gains since the difference in dividend yield was nowhere higher than 2.2% (ZDV's 4.9% vs XIU and XIC's 2.7%). One supposedly dividend fund, Vanguad's VDY, actually yielded less at 2.6%, than the TSX! But its capital gains far outpaced the TSX and it was the highest return fund of all. The dividend ETF return advantage manifested itself consistently for those funds - HAL, XDV and CDZ - with a longer history of 3 or 5 years. This is not just one or two sectors, like financials or energy, doing especially well. XDV achieved the outperformance with a high concentration in financials and energy while CDZ achieved it with a markedly lower concentration in those sectors. We note in passing, though again the time frame is too short to be sure, that these results conform to the general findings about superior returns from dividend stocks that we wrote about last July
  • Volatility of dividend ETFs is less than the TSX - The numbers on beta, which measures sensitivity to moves of the overall market where a beta of 1.0 equals the market (i.e. XIC) and under 1.0 is less volatile, show that almost all the dividend ETFs are significantly less volatile than the TSX. The figures on absolute volatility of each ETF as measured by standard deviation of its returns compared to XIU and XIC indicate the same result. The Sharpe Ratio, which measures return over standard deviation, i.e. the higher the ratio the better, shows that most of the dividend ETFs did much better than both benchmarks during 2013. More return, less volatility risk, that's a good place to be, if it keeps up.
  • Some of ETFs' distribution (aka dividend) increases did not keep pace in 2013 - What surprised us even more is that several dividend ETFs in our list did not increase their cash distributions, because their holdings did not, as much as the benchmark ETFs. XDV, XEI, DXM and PDC had significantly lower distribution rises from 2012 to 2013 than either XIU or XIC. 
  • Long term distributions of XDV and CDZ are rising nicely - Perhaps what is most important for the investor seeking the higher distributions is the possibility that such higher distributions can be maintained in the long run. That seems to be the case so far for the two ETFs with the longest track record as the graph below shows. XDV has maintained its lead over XIU and CDZ, after a big drop in 2010 and 2011 when the big banks fell afoul of CDZ's selection criteria by not increasing dividends, seems to be recovering strongly.

Which Dividend ETF is best?
We still don't like HAL much for its high MER, lack of visibility (it doesn't publish its full holdings) and lower distribution rate, nor VDY which looks more like a value-oriented capital appreciation fund. It's hard to pick amongst the rest - good points of each one are offset by some weak points. ZDV would still be a slightly preferred option for those whose purpose in looking to this kind of ETF is to obtain high steady income. It had the highest trailing distribution yield, the tied highest forward looking distribution yield and the second highest increase in distributions in 2013. CDZ is an alternative for a mainstream type equity holding with a slightly higher dividend and perhaps/probably/hopefully better long term returns but the same risk characteristics as the overall market.

Disclaimer: This post is my opinion only and should not be construed as investment advice. Readers should be aware that the above comparisons are not an investment recommendation. They rest on other sources, whose accuracy is not guaranteed and the article may not interpret such results correctly. Do your homework before making any decisions and consider consulting a professional advisor.

Friday, 24 January 2014

Taxes 2014: Compendium of Links & Resources for Filing 2013 Income Tax

Tax season is starting. The Canada Revenue Agency will soon open up the NETFILE online electronic tax filing service to receive returns electronically. It's time for Canadian investors to start getting ready for filing their 2013 income tax return. There can be a multitude of slips and receipts to assemble, not to mention older records to dig up and preliminary calculations to do in order to be ready in time for filing on or before the deadline of April 30. We therefore present a collection of resources that should cover the tax information and tools needs of Canadian online investors.

Tax-specific Websites

Key Dates -  see complete CRA list of dates for individuals
January – mid CRA pdf tax forms for printing available for download 
February - 10 CRA online filing service NETFILE starts accepting 2013 tax returns; last day is January 16, 2015
March – 3 RRSP contribution – last day for making contribution applicable to 2013 tax year
April – 30 CRA – last day to file 2013 return and pay amounts owing to avoid penalties
June – 15 CRA – last day to file 2013 return for self-employed though amounts owing deadline is still April 30
December – 31 RRSP – last day for making an RRSP contribution in the year you turn 71
continual CRA issues tax refunds, often within days, if return is filed electronically
TFSA contributions anytime during year for 2014 or missed past years since 2009

CRA dates are rigid; be late even by a day and you will miss out or suffer penalties. On the other hand the tax documents below relating to the 2013 tax year flood in progressively from mid-January to the end of March. There can be weeks or more of variation amongst companies that issue the slips and receipts.

Checklist and guide for interest, dividends and capital gains
If your investing involves … look for these documents … from these organisations ....

Borrowed money to invest Investment interest expense on statements from broker for margin, or bank for loan
Canada Savings Bond interest T5 slip (min $50 interest) from broker if held in a broker account or from Bank of Canada if bought directly from BOC;
GIC interest T5 slip (min $50 interest) from broker if held in a broker account or from bank or trust company if bought directly
T-Bill and Stripped Bond interest Annual summary of security transactions Interest = redemption/sale amount – purchase cost; for details see

T5 does NOT show it, even when over $50 e.g.
Mutual fund distributions T3/T5 slips mailed directly by Mutual fund companies, NOT brokers, even when fund is held in a brokerage account
Mutual fund capital gains (sales) Annual summary of security transactions from broker if held in a broker account 
from mutual fund company if held directly with the mutual fund company  click on links to fund companies at and then look for tax or Distribution info

Bond interest T5 slip (min $50 income) broker
Bond capital gain or loss (sale or maturity) Annual summary of security transactions broker provides statement at purchase year and at maturity or sale; for how to calculate see
Stock dividends T5 slip (min $50 income) broker
Stock capital gain or loss (sale) Annual summary of security transactions broker provides statement at purchase year and at maturity or sale
ETF and REIT distributions T3/T5 slips broker
ETF, REIT, Income Trust, Closed End Fund capital gain or loss (sale) Annual summary of security transactions + own records broker for trading transaction summary

Investor must track own adjusted cost base – see

ETF providers publish tax breakdown of distributions on their website. ETF providers in Canada list and links at

Income Trusts and Closed-End Funds - ACB Tracking Inc has a pay service that simplifies the tracking
Split Corporation income T5 broker

Checklist and guide for account withdrawals, contributions
If your investing involves … look for these documents … from these organisations ....

RRSP contributions RSP Contribution Receipt RRSP account trustee, be it broker, bank, mutual fund company
RRSP contribution room various see four ways to find out -
RRSP / RRIF / LIF / LRIF withdrawals T4 RRSP / RRIF slip RRSP/ RRIF account trustee
RRIF / LIF / LRIF withdrawal limits Evaluation letter or phone call broker
Annuity payouts T4A and T5 slips mailed by insurance companies, both for registered or non-registered annuities
RESP withdrawals T4A Educational Assistance Payment or Accumulated Income Payment slip brokers or financial institution where RESP is held
Non-resident taxpayer NR4 slip broker
TFSA interest, dividends, capital gains, contributions and withdrawals none None – happy days! No tax reporting to do
TFSA contribution room and contribution or withdrawal history phone call or online Canada Revenue Agency – see

Tax News, Tips and Blogs - to remind us of the latest developments, the implications, the gotchas and possible strategies to legitimately minimize what we pay
 Books - buy them online, read them offline at leisure

Software - to prepare and NETFILE income taxes electronically; the best packages guide you and make suggestions to optimize your taxes

HowToInvestOnline Tax-related Posts - our most popular and presumably most useful tax posts

Tax Calculators - for tax planning, what if scenarios and estimation
  • Canadian Tax Calculators - a Basic version, an Advanced version for all provinces except Quebec, one for Quebec, with all the tax credits and a special Investment Income version that compares different types of income, especially useful for retirees.
  • Ernst & Young - ultra-simple, enter your taxable income and it shows you by province total tax (using the basic personal tax credit only) as well as marginal rates on ordinary income/interest, capital gains and dividends;  very handy when you have a taxable and tax-sheltered investment accounts to see which types of securities should go in which account
  • RRIFMetic - sophisticated tool (not free, costs $99) for planning and optimizing for retirement income including taxes on types of accounts (taxable, RRIF, LIF, TFSA, RESP) and types of income (dividends, interest, capital gains) plus factors in non-investment cash flows; helps decide how much to take from which account during retirement.
Tax Discussions - read what other people are grappling with and learn from their experience or register and you can take part, ask questions and perhaps get good answers
These resources will make it easier to pay your taxes quickly with minimal frustration at the very least and probably to pay less as well.

Disclaimer: this post is my opinion only and should not be construed as investment or tax advice. Readers should be aware that the above comments are not an investment recommendation. They rest on other sources, whose accuracy is not guaranteed and the article may not interpret such results correctly. Do your homework before making any decisions and consider consulting a professional advisor.

Wednesday, 22 January 2014

Tax Planning for Investors in or near Retirement: Age Credits and OAS Clawbacks

Many if not most investors are aware of the fact that eligible Canadian dividends held in a non-registered taxable account are grossed up before inclusion in income. From 2012 onwards, the gross-up on the actual dividend paid has been 38%. There is a sufficiently large offsetting tax credit such that the investor pays a lot less tax on dividends than on interest or employment income (see our post on how the mechanics and reality of dividend taxes work).

But there is a complication for someone over 65 in retirement. The Old Age Security Pension (OAS), an amount up to $6582 paid annually to over 65s meeting Canadian residency requirements (see's explanation and Government of Canada info) and the Age Amount tax credit, worth up to $1028 reduction in tax, are progressively reduced the higher is Net Income on line 236 of a tax return. Thus, $1000 of actual dividends is grossed up 38% to $1380, and the dividend tax credit only gets applied lower down in the tax form. Line 236 includes the grossed-up amount of dividends. The gross-up acts as a penalty. Other types of income, like interest and foreign dividends are not grossed up while only half of actual capital gains are included in income of line 236.

Retired investors, or those soon looking to retire, may wonder if they should dump their Canadian dividend stocks and instead buy foreign stocks (whose dividends are not eligible for the tax credit and do not therefore get grossed-up) or perhaps buy interest generating fixed income in a taxable account. Let's address this question.'s handy-dandy calculator

We have used the Investment Income Tax Calculator on to demonstrate what is a very simple conclusion - dividends are tax-advantaged enough that they are still better than interest or foreign dividend income no matter the province or your tax bracket. There is a loss of Age credit and/or OAS but much less than the extra income tax on interest or foreign income. However, capital gains are almost always the best way to receive income, if that is possible.

We entered the 2013 maximum amounts of CPP and OAS along with combinations of either interest and/or foreign income, which are both taxed at the highest marginal rate of Other Income, or capital gains, or eligible Canadian dividends, plus withdrawals from a RRIF or other pension plan income.

Scenario 1 - Income high enough to trigger reduction in the Age amount tax credit - $51,732
Capital gains and dividends give pretty close results but interest and foreign income incurs significantly more tax. In Alberta, at these more modest income levels, eligible dividends win by a hair.

Scenario 2 - Income that triggers both an Age amount tax credit reduction and OAS clawback - $73,732

Capital gains clearly is best while interest and foreign dividends engender even more tax. The pattern is the same across all provinces.

Scenario 3 - Income high enough to trigger large OAS clawback - $93,732
The bottom line is the same as scenario 2.

  • There is no tax reason to alter a retirement portfolio away from Canadian equities because of Age Amount tax credit reduction or OAS clawback. If anything the reverse is true. Portfolio asset allocation and account placement of holdings do not need to change.
  • The conclusions we reached a few years back about the desirability of dividends and capital gains across provinces hold true for retired investors. As the years are passing and TFSA accounts grow larger with piling up the yearly contributions (there is $5500 contribution room again this year bringing the total since 2009 to $31,000), they can form a significant component of tax planning during withdrawal since any TFSA withdrawal doesn't enter taxable income at all.
  • Some ETFs that are highly tax efficient may be especially attractive to retired investors, though we found out last year that the best type of distribution in tax terms, Return of Capital which doesn't get included in immediate income and is deferred capital gain, may not be so good in certain ETFs.
Disclaimer: This post is my opinion only and should not be construed as investment advice. Readers should be aware that the above comparisons are not an investment recommendation. They rest on other sources, whose accuracy is not guaranteed and the article may not interpret such results correctly. Do your homework before making any decisions and consider consulting a professional advisor.

Monday, 13 January 2014

Canadian CEO Pay Update: Who earned their pay by rewarding investors?

Last week we threw some mud at companies that paid their CEOs handsomely while investors suffered. This week we look at the good side of the ledger for investors, where CEO and top executive pay may have increased but investors did as well or better. We also look back at our similar 2012 list of companies where pay and stock returns aligned well.

Stocks where the investor reward came first
The data covers up to 2012 only since the original source is the Management Proxy Circular that companies must file with regulators and give to shareholders before every annual meeting. 2013 pay data will start to become available as companies file their reports covering 2013 on Sedar. We copied much data from the report  All in a Day's Work? (CEO Pay in Canada) by the Canadian Centre for Policy Alternatives' Hugh Mackenzie since he has done all the laborious grunt work of compiling the pay numbers of the 100 best-paid CEOs. However we also decided to widen the search for good companies to all those in the TSX Composite by looking at the Globe and Mail's Report on Business 2013 Board Games table. In particular the table shows 5-year total returns. We picked out the stocks with the highest returns to see which gave the most investor return "bang" for the CEO pay "buck". Finally, we did our own rooting through to find companies where the pay of the top company executives (called Named Executive Officers or NEOs in the Sedar reports), not just that of the CEO, rose less quickly than the total stock return from 2007 to 2012.
(click image to enlarge table)

One of the companies in the above list that illustrates what we are looking for is Cineplex. Its Proxy Circular includes the following graph of stock returns rising much faster than executive pay. Four companies, Cott, Keyera, Canadian National Railway and Yamana Gold, managed to achieve a more extreme outcome - excellent stock returns while executive pay declined over the five years.
(click to enlarge)

Our list of twenty-three stocks that rewarded investors more than CEOs or executives is not exhaustive. But the margin of reward vs pay was getting slimmer as we worked our way down the list of stocks. Note how Thomson Reuters 5-year stock return at 17% barely exceeded the 8% rise in total executive pay over the period. Thomson is also much higher up the relative pay scale in 2nd spot than the returns scale in 114th spot.

Some idea of other stocks that have achieved a reasonable relationship between shareholder return and executive compensation, based on 3-year data instead of our five years, comes from the following chart in the 2013 Magna proxy circular. The best place for a company to be is to the right of and below the middle diagonal line. Some caution is still necessary. For instance, Eldorado looks ok on the chart, being smack in the middle on the line. However, on a 5-year basis executive pay rose an astounding 1193% while the stock only gained 10%.
(click to enlarge)

The fate of the good companies in our 2012 post - some are still so, others have gone bad
Eight companies have reappeared - shown in green - from our 2012 post of the good guys at that time. Catamaran, Valeant, CGI Group, Pacific Rubiales, Methanex and Open Text have given their executives what look in some cases like lavish pay increases but investor returns have been even higher. Canadian National Railway and Yamana on the other hand have seen their executive pay decline while stock returns have still surpassed the benchmark TSX Composite's modest 4% total gain.

Many of the other companies on our 2012 pay angels list have fallen badly since. Some have gained more than the TSX but executive pay has risen much faster: Osisko (stock +58%, executive pay +235%), Eldorado (+10% vs 1193%), Westport Innovations (+116% vs 231%) and Alamos Gold (+188% vs 253%). Others like Agnico-Eagle Mines (-45% vs +209%) and SNC Lavalin (-19% vs +24%) have drastically under-performed the TSX and executive pay has continued to rise. Sometimes executive pay has fallen but nearly as much as the stock decline, like Potash Corp (-47% vs -24%).

As before, a favourable balance between CEO and executive pay and shareholder reward is a worthwhile but partial indicator of a company that is well managed by the Board of Directors. Repeat appearances on the good guys list reinforce the notion that a company has a durable good culture in place.

Disclaimer: This post is my opinion only and should not be construed as investment advice. Readers should be aware that the above comparisons are not an investment recommendation. They rest on other sources, whose accuracy is not guaranteed and the article may not interpret such results correctly. Do your homework before making any decisions and consider consulting a professional advisor.

Tuesday, 7 January 2014

Top-100 Canadian CEOs Update: Who is the most Over-Paid?

The Canadian Centre for Policy Alternatives' Hugh Mackenzie has come out with All in a Day's Work? (CEO Pay in Canada) which shows how much the best paid 100 CEOs of Canada's biggest public companies received in 2012. There is no doubt every one of them was paid a lot, but for the investor, whether that was too much or too little depends on how the company has done for the investor. The report doesn't address that issue so this week, we'll look at those companies who we think have over-paid, those combining Top-100 pay with poor returns. We'll also take a look at the fate of companies that were on our previous list two years ago of the most Over-Paid CEOs.

The Eleven Losers - lousy investor bang for CEO bucks
As can be seen in the table below from GlobeInvestor's WatchList, the stock and company performance numbers don't come anywhere near to matching up with the Top-100 pay of their CEOs. Poor total stock returns along with operating or net losses, no dividend growth, low or negative Return on Equity suggest strongly that the CEO did not earn his, or in the case of TransAlta her, high pay.

(click to enlarge image)

The most egregious transgressor has to be Niko Resources (TSX symbol: NKO). While CEO Edward Sampson has been getting rich, investors have been getting poor. Most galling and surprising, Sampson and Niko were also in the most over-paid list two years ago. Niko's latest quarterly income statements on TMX Money show no sign of improvement. Why analysts would even give this stock as much as a Hold rating mystifies us. The stock has followed a steady downward path for years now as the Yahoo Finance chart below shows.
(click to enlarge image)

Blackberry's (TSX: BB, formerly Research in Motion, which is what appears in the Mackenzie report, though the name change hasn't helped the reality) slide has been a painful public spectacle, painful, to be precise, for investors, but not the 2012 CEO Thorsten Heins. Is the high CEO pay compensation for having to endure the frustration of inability to turn the company around? Heins probably did not get all the $10.2 million in 2012 pay since his $9.5 million award in stock would have gone down too. But his 2013 pay will show handsome recompense as he was given a $22 million settlement when he was fired in November. Looks like a classic "heads, I (CEO Heins) win, tails, you (investors) lose".

The gold stock slump has hit a number of companies in our most over-paid list. Some show bad business performance while others are faring better. Barrick Gold Corp, Turquoise Hill Resources, Goldcorp Inc, Detour Gold and Kinross Gold are uniformly bad - poor stock performance and money-losing business results. Agnico-Eagle Mines and Eldorado Gold have experienced lower profits but they are still profitable. The two companies were among the miners who looked like stronger bets in our recent review.

Similarly, EnCana and TransAlta have gone through slumping business income while remaining profitable. Nevertheless, it sure looks like these CEOs, by remaining in the Top 100, are being paid primarily for the size of their empire instead of results.

Though not in our table, another CEO who received far too much in 2012 is Benoit La Salle of gold miner Semafo, whose $4.0 million included a special payment of $3.0 million, which appears to be a good-bye bonus, when he stepped down as CEO in August 2012. That was just before the ensuing series of quarterly results have reported unrelenting large losses.

The 2012 Over-Paid - How things sort themselves out over time
Two years on, the formerly over-paid have mostly found their proper place in a couple of ways:

1) Falling pay drops CEO out of Top-100 - Yellow Media, Nordion, Air Canada and Cott have all reduced their CEO's pay in absolute terms and relative to other companies. For example, Nordion CEO Steven West's pay of $1.2 million in 2012 is much saner than the $13.1 million handed over to the previous CEO in 2010. Interestingly, its stock has done very well in the past year too. Less pay equals better performance?

2) Better company and stock performance - Cameco, Manulife, Sun Life and Magna have all improved since 2010 so that the balance of pay with results is much less out of whack.

Perhaps RONA will attain this status if new CEO Robert Sawyer (since November 2012) does a better job than Robert Dutton, who received a severance package of $4.5 million. There have been big quarterly losses until the most recent quarter along with much restructuring. We won't know how much Sawyer is paid until the Proxy Circular for the next annual meeting is issued around the end of March. Or perhaps RONA will fall into the next category.

3) Still way over-paid - To Niko, we add Sherritt, the shrinking mining company. Sherritt CEO David Pathe's $2.7 million pay in 2012 puts him a fair distance below the #100 spot's pay of $3.8 million and well below former CEO Ian Delaney's $4.2 million 2010 pay. However, the company is now losing money and having to shed assets.

Outlandish CEO pay can be a warning sign for investors as an indicator of a company run by the managers for the managers and not by the Board for the shareholders. It's another tool in the analysis toolbox.

Disclaimer: This post is my opinion only and should not be construed as investment advice. Readers should be aware that the above comparisons are not an investment recommendation. They rest on other sources, whose accuracy is not guaranteed and the article may not interpret such results correctly. Do your homework before making any decisions and consider consulting a professional advisor.