The Canadian Investor - Episode 1 - Registered accounts and CN Rail

Episode Date: November 26, 2019

In this episode we go over the types of Canadian registered accounts. In the 2nd part of the episode we discuss Canadian National Rail ticker CNR.TO / CNI--- Send in a voice message: https://anchor.fm/the-canadian-investor/messageSee omnystudio.com/listener for privacy information.

Welcome back into the show. This is the Canadian Investor Podcast, made possible by our friends and show sponsor, EQ Bank, which helps Canadians make bank with high interest and no fees on everyday banking. We also love their savings and investment products like GICs, which offer some of the best rates on the market. I personally, and I know Simone as well, is using the GICs, which offer some of the best rates on the market. I personally, and I know Simone as well, is using the GICs on a regular basis to set money aside for personal income taxes in April of every year. Their GICs are perfect because the interest rate is guaranteed, and I know I won't be able to touch that money until I need it for tax time. Whether you're looking to set some money aside for a rainy day or a big purchase is

coming through the pipeline or simply want to lower the risk of your overall investment portfolio, EQ Bank's GICs are a great option. The best thing about EQ Bank is that it is so easy to use. You can open an account and buy a GIC online in minutes. Take advantage of some of the best rates on the market today at eqbank.ca forward slash GIC. Again, eqbank.ca forward slash GIC. Live from the great white north, this is the Canadian Investor, where you take control of your own portfolio and gain the confidence you need to succeed in the markets. Hosted by Brayden Dennis and Simon Belanger. Welcome to episode one of The Canadian Investor. Today we're going to talk about the different investment vehicles that you can get in Canada,

investment vehicles that you can get in Canada, particularly the TFSA, the Tax-Free Savings Account, and the RRSP. There's also the RESP and a taxable non-registered account, but we're going to really focus on the two most important ones for Canadian investors, which are the TFSA and the RRSP, which stands for Registered Retirement Savings Plan. And I'm going to start off by discussing the TFSA, the Tax-Free Savings Account. The TFSA is an awesome vehicle and where I tell most people to start. And the reason for that is because you are going to get tax-free capital gains over the long term compared to tax implications later when you withdraw on your funds in an RRSP. So we can dive more into that. The TFSA has a contribution limit, as of recording this in 2019, of $6,000 a year. So every year, you're allowed to contribute $6,000

into this account. And on your CRA My Account, you can see what you've already contributed, which is a very handy tool to make sure you don't over-contribute. And here's the awesome part about the TFSA, is that you can catch up on previous years. the awesome part about the TFSA is that you can catch up on previous years. So this year, $6,000, last year, $5,500, the previous year, $5,500. And then in previous years, under the Harper administration, you could contribute $10,000. So you can contribute all the way back to years of its existence since you were the age of 18. That is it in a nutshell. Simon, do you have any comments on the TFSA in particular? Yeah, so the TFSA is a really awesome tool, and I think it's not really understood by a lot of people. A lot of people, and I get this at work when I explain it to them, is they have

this conception that a TFSA is an actual savings account, but likeayden mentioned, it can be used for a variety of investment, whether it's specific companies, whether it's ETFs, mutual funds even, and we can dive in a bit later on those. But it's a great saving vehicle and it's really ideal for people that either have a low taxable income right now or when they do retire and they for example have a great pension well they have that extra income that's tax free so it's a great vehicle for that the one caution i would mention that people tend to forget especially for those are already pretty close to their contribution limit if ever you withdraw money just be careful because the uh contribution room you'll get it back the following year so you won't get it back that same year. And that could be a pretty costly

mistake if you over contribute. Yeah, absolutely. And the nice part about that is if you make gains, that is going to add to your contribution limit the next year, as I believe, which is pretty great. Yeah, in terms of gains, it doesn't impact your contribution limit. However, if you withdraw it and those gains you withdrew, for example, you had awesome returns, you have $100,000, you withdraw it, and then the following year, you'll get the $100,000. You have the $100,000, right. So in that sense, you get your, yeah, that's really handy. But yeah, good point point because it doesn't reset until the following year. And I love how you brought up how it's so misunderstood.

Oh my God, this account is so misunderstood. The amount of people that think it's a great place to park cash is astounding because this isn't a vehicle you should be focusing on compounding your wealth in because there's no tax. You're going to pay tax on your income, of course, but then the tax man is staying away from it forever after that point. So that's why that account is so valuable. I have actually, I remember when I was first starting to invest and understanding that the TFSA was really misunderstood. I was inquiring to CRA about changing the name to TFIA, Tax-Free Investment Account.

And every time I tell people that, they're like, oh, that's a great idea. It's like the easiest change ever. And the amount of people that would benefit from changing it to TFIA, I think would be like pretty substantial. Oh, yeah, definitely. And I mean, I see that, you know, I work in the pension and retirement and I actually work in a financial institution and the amount of people that still like get surprised when I tell them that you can hold different equities, different companies in there. It's kind of astonishing. Absolutely. So before we move on to the RRSP, it is important to mention, this is very important actually, that you will get withholding tax. You will trigger withholding

tax on U.S. equities or international equities for that matter if you hold them in a TFSA. So if you're holding U.S. stocks or international stocks abroad, you want to hold those in an RRSP because the U.S., for instance, recognizes the RRSP as a retirement account and waives withholding tax. So that is important to note. Yeah, definitely. So just keep that in mind. I mean, it's allowed to have U.S. investments in it, but you will have that withholding tax.

So just keep that in mind if you do put U.S. stocks, for example, in your TFSA. I was reading an article on that, and you can think of that withholding tax for most dividend paying stocks because that's where you're going to trigger it. Think of it as like a 0.6% management fee or like that's usually a good rule of thumb, 0.6% if you do want to hold them in a TFSA. I never thought about it that way, but that's a good point. Yeah. Do you want to kick off the RRSP? Because I know you're a whiz with these accounts. Yeah.

So RRSPs, or short, people will hear RSPs. It's all the same thing. So it's a registered retirement savings plan and really the advantage of an rsp you typically like want to contribute to an rsp when you're in your earning years you have a high income with the purpose of starting to withdraw the money when you're retiring or your income is lower therefore your income tax bracket will be lower so any gains that you make in the rspSP is actually tax-free. You get taxed when you start withdrawing it and it adds into your income. So that's the whole thing about the tax bracket and how it works for the RRSP. RRSP, the main difference with the TFSA. So the TFSA is you put

money in there that's already been taxed and any gains are tax-free. The RRSP is actually the opposite of that. So you put money in there that is pre-tax or obviously for a lot of people, what they'll do is they'll get taxed on that money, they'll put in their RRSP and then when they do their income tax report to the CRA, they'll actually get the tax credit back. So there's a couple different varieties for RRSP. So there's a the tax credit back so there's a couple different varieties for RSPs so there's a locked-in variety and there's a non-locked-in variety so the non-locked-in that's probably what people are most familiar with the non-locked-in variety you can actually withdraw the

funds whenever you want you don't have to be retired you just have to keep in mind that it adds into your income so you'll be taxed on it. The banks are required to, or a financial institution are required to take off a withholding tax, but it's usually not enough. So you tend to have to put more money aside when you do withdraw it. The RRSP, really, you have to be careful. If you start withdrawing money, you actually lose that contribution room for good so it's not like the tfsa where you actually gain it the following year and then we get into the whole locked in rsp or there's also a locked in retirement account without going into too much detail they're very similar it just depends basically those are

associated with funds that were in a pension plan. So it really depends if your pension plan was provincially legislated or federally legislated. The main thing about those is they're locked in. So it says in the name, it's like an RSP, but you can only withdraw the funds when you're retired. So that's the gist of it. If you have certain, the CRA does give provision for hardship, but it's very specific situation. So you won't be able to withdraw those funds as you wish. You'll have to be retired. Yes.

And at the age of 72, is it right now that it converts to a RIF? So it's actually December of the year in which you turn 71. Okay. Yeah. Very, very, very close. We'll call it 72 um okay yeah so those details are important but yeah so 72 then you turn into a riff and then you are forced to withdraw on it every year and like you said brayden it's a great vehicle for those who um especially

don't have a pension plan uh so it's a great vehicle for those because your income is going to be lower when you do retire. And just as a side note, the TFSA is tax-free, so it does not add to your taxable income. But it's also a great vehicle if you want to invest in U.S. companies, for example, then that actual, that dividend you were talking about, the U.S. withholding tax, it's not applied anymore so you get the full dividend obviously you'll get taxed when you withdraw from your rsp yeah perfect so i think the easiest way to understand the rsp for our listeners is going through a couple examples

we'll just make up some fake fake examples so i tell people with the RRSP is that, yes, you probably should have one, but sometimes you shouldn't. There's a couple that you can also over-contribute to it, which is going to force yourself into a high tax bracket when you're retiring. So that kind of defeats the whole purpose. But okay, let's go through some scenarios. So if I am working at a company that has an RRSP matching program, then that is a good idea. However, do you see often that you lose control of what you're investing in if you are going into the RRSP matching program? As do-it-yourself investors, we want to keep our fees low. That's why Simone and I have been using Questrade as our online broker

for so many years now. Questrade is Canada's number one rated online broker by MoneySense. And with them, you can buy all North American ETFs, not just a few select ones, all commission-free so that you can choose the ETFs that you want. And they charge no annual RRSP or TFSA account fees. They have an award-winning customer service team with real people that are ready to help if you have questions along the way. As a customer myself, I've been impressed with Questrade's customer service. Whenever I call or email, every support rep is very knowledgeable and they get exactly what I need done quickly. Switch for free today and keep more of your money. Visit questrade.com for details. That is questrade.com.

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Yeah, so most of the RSP matching program, there are some programs that are done to actually match RRSP, but most programs will actually be set up a bit more as a pension, so a defined contribution pension where the employer will match. You do lose some control typically, so they'll give you a list of investments. It can be anywhere between 10 and 20 different type of investment that you can choose from. They're not always the best, so you could lose some control over there. My reasoning behind it is, especially if you're getting a one-for-one match, so your employer will say they'll, you know, the first $5,000 that you contribute will match $5,000. So one-for-one,

$5,000 that you contribute will match $5,000. So one for one. To me, everyone should do that. It's free money. So you're basically getting almost guaranteed returns just on the match. Obviously, there could be some market swings and downturns and so on. But to me, that's a no-brainer. Beyond the match, then I think there might be some more discussion whether that's worth it or not.

Yeah, exactly. Because the whole goal of this podcast is to educate listeners on managing their own portfolio so that they don't have to pay the highest fees in the world, in Canada, unfortunately. So this is like one of those tricky situations where you're going to lose control. And in that case, probably be thrown into a high fee management structure on your money. But at the same time, it's like, how do you say no to an interest and 100% return? So that would be a case where you would definitely want to use it. Although it might kill you inside to have to pay high management fees. But that's, I mean, it is free money. Yeah. And if we get more questions, and that's the whole goal, we want to get people engaged in this. So if we have enough questions about like pension, whether it's defined contribution,

defined benefit, I know that space really well. That's what I do. I'd be more than happy to even like do an episode with you where we kind of answer people's question regarding their pension plans, a bit what they offer, even if people want to share some of the investment, we can kind of give our take on that. So if there's enough demand for it, we could even do an episode at some point that will solely focus on that. Yeah, absolutely. We can definitely consider that. Okay, let's jump through one more situation with the RRSP, which would be back on that same topic of a pension. I see myself working there for the next 35 years. I'm going to max out the pension. And then in my retirement years, I also have this RRSP. And would you look at that? I'm in the highest tax bracket because of this pension and withdrawing on my RRSP. So in that case, what would you say the strategy is there?

And I'll give my quick take on that is you kind of have to do the math on what the most advantageous thing to do would be. Have a little bit of an RRSP, max out your TFSA, and then actually look at a taxable account because you're going to get taxed along the way. But it might make sense in your case because you are in such a high tax bracket when you are withdrawing on the funds. Yeah, I totally agree with you on that. There's other consideration too. I won't go into detail, but depending how high your income will be when you're retired, you could even lose money based on old age security benefits because it actually claws back at a certain level. I think it's in the 70s, 70,000s or so. I don't have the exact level in front of me, but that's one of the drawbacks. I totally agree with Braden on that. If you have a very generous pension, most likely the TFSA and then a taxable account is probably your best bet. Yeah. Okay. Perfect. So I think both of those, yeah, those are the most important accounts for sure. So in summary, a TFSA is kind of like, yes, everyone

should have one. This is a great start. There is a limit to how much you can contribute every year, but you can catch up and you are going to pay tax on your income as it comes off your paycheck every two weeks, every month, whatever it is. And then after that, you're going to let it grow and compound completely tax-free. However, do not, or you can, but be aware of the withholding tax on international listed stocks. So the US stocks, for instance, there will be a withholding tax. I have seen a rule of thumb of around 0.6% to think about that as a withholding tax. Do you want to give a quick summary on the RRSP? Yeah, the RRSP is really, it's a perfect vehicle, especially if you're a high earner right now and you will not be earning as much money when you do retire.

So that's really when the RRSP is the most advantageous. So lowering your taxable income now for the future and taking advantage of your lower taxable income when you retire. Nothing prevents you from combining some money in a TFSA and R RSP, but that's generally the rule of thumb. And one situation that I think is great for a TFSA, not the RSP, but if we have some young listeners, for those of you who are not making that much money, but have a little money assigned when you're younger, usually you don't pay a lot of taxes, especially if you're going to school. So for the young listeners, the TFSA would definitely be the way to go. Awesome. So I think that's a good summary of those two accounts.

We're going to do something now, part of the show, that we'd like to do every single episode with listeners requesting certain stocks that are listed on the Toronto Stock Exchange or in Canada. We're going to start with this one, CN Rail, Canadian National Railway, ticker CNR. This stock is obviously a railway stock. It's been a good performer over the last five years, up 52%. It's an $84 billion market cap. So in the scheme of things in Canada, this would be considered a mega cap, one of the biggest companies in the entire country. It has a dividend yield of 1.83%, but people own this one for its dividend growth.

It is a proven dividend aristocrat. Over the last five years, it has had over 15% dividend growth, which is awesome. Those are numbers you want to see if you're a dividend growth investor. What kind of numbers are you seeing on this one there, Simon? Yeah, so there's a lot of things to uh to like about canadian national rail i'm familiar with that company full disclosure i do own it um so i think it's a great company uh before looking at some of the numbers one of the few things that i love about canadian national rail is its moat so for those of you not familiar with what a moat is is really a barrier to entry so it's very difficult for competitors to come in.

The reason for that, Canadian National Rail has a railway from east to west coast. Canada also goes all the way to the Gulf of Mexico. So it has the three coasts. So that's a big competitive advantage for them. Very hard for competitors to come in. And especially building a railway requires a lot of approval, a lot of capital intensive and so on. So it's a great company from that perspective. From a pure number standpoint, usually I think Braden will look at these numbers as well. So

we'll look at the price to earnings ratio. The price to earnings is pretty much another synonym to earnings is profits, net profits. So what price am I paying for the company compared to its profits? So right now, CNRail is around $19.20 from Morningstar data. In terms of other metrics that we'll look at for this type of company, you could also look at the price to cash flow cash flow is really the money that's coming in and out so it's not always the same as the price to earnings and without going too much into detail in terms of some of the other metrics there's the price to book as well so the price to book you're just taking the net asset and you're comparing that to the price of the company.

And the net assets, you just take the assets of the company, you subtract the liabilities, and then you compare that to the price. Do you have anything to add, Braden? As do-it-yourself investors, we want to keep our fees low. That's why Simone and I have been using Questrade as our online broker for so many years now. Questrade is Canada's number one rated online broker by MoneySense, and with them, you can buy all North American ETFs, not just a few select ones, all commission free so that you can choose the ETFs that you want. And they charge no annual RRSP or TFSA account fees. They have an award-winning customer

service team with real people that are ready to help if you have questions along the way. As a customer myself, I've been impressed with Questrade's customer service. Whenever I call or email, every support rep is very knowledgeable and they get exactly what I need done quickly. Switch for free today and keep more of your money. Visit questrade.com for details. That is questrade.com. Calling all DIY, do-it-yourself investors, Blossom is an essential app for you. It has been blowing up with now more than 50,000 Canadians plus and growing who are using the app. Every time I go on there, I am shocked.

The engagement is amazing. This is a really vibrant community that they're building. And people share their portfolios, their trades, their investment ideas in real time. And it's all built on the concept of transparency because brokerage accounts are linked. And then once you link your brokerage account, you can get in-depth portfolio insights, track your dividends, and there's other stuff like learning Duolingo style education lessons that are completely free. You can search up Blossom Social in the app store and join the community today. I'm on there. I encourage you go on there

and follow me, search me up. Some of the YouTubers and influencers and podcasters that you might know, I bet you they're already on there. People are just on there talking, sharing their investment ideas and using the analytics tools. So go ahead, blossom social in the app store and I'll see you there. Yeah, absolutely. I'll talk about some of the numbers in terms of why I would own the stock and some things to also be aware of so as as we talked about this stock is 86 billion in market cap so it's it's a massive massive one trading at 20 times earnings as you just mentioned with a almost 2% yield so you're gonna own this one for its dividend growth over the last 10 years.

It's been a proven dividend aristocrat. And the thing about this stock is it has a very, very high return on equity and return on invested capital. So management is able to take shareholders' money, in theory, and invest it at a very high rate of return, which is definitely what you want to see from any business. I'm just looking at its five years earnings growth. It's averaged around 13%, and the top line around 6%, nothing crazy there.

around 6%, nothing crazy there. But if you look at the five-year dividend growth, it's around 15% a year. Every year, they're increasing that payout and keeping a low payout ratio. So what's important about the payout ratio is essentially what it is, all the dividends that are paid out over the year divided by all the net profits made by the company that year. And that'll give you the payout ratio. So CN Rail is paying out 33% of earnings over the last 12 months, the last four quarters. And that's a safe number. If you start getting over, well, in theory,

let's talk about if it's over 100%, that means that the dividend is probably not sustainable as they are paying out more to shareholders than they can actually afford. So they're having to burn cash to pay the dividend. is 221, which is about middle of the pack. And the reason for that is the 20 times earnings for limited revenue growth doesn't score that high. That being said, you own this because it is a workhorse in the not only Canadian, but North American economy. It's safe and it is going to keep appreciating that dividend for a long time. I don't see any risk of the dividend stopping its status as a dividend aristocrat, which,

by the way, we should have an episode on. Do you have any more to add to that? Yeah, I think those are all great points. One other thing, I love the payout ratio. That really gives you a bit more certainty in terms of the dividend. I personally like to look at the payout ratio compared to the free cash flow. That's always a good indicator I find as well. It's a different way to look at it. The free cash flow, for those who are not familiar with, you can look at the cash flow statement of a company. And you essentially look at the net cash provided by operating activities and you just subtract the capital expenditures

what is capital expenditure is what the company is making in investments whether it's building with certs buying locomotives for a company like Canadian National Rail so you subtract that and whatever is left is the free cash flow and then you just simply compare the dividend to the free cash flow. And just looking at it, eyeballing it, it's about 50-55% of the free cash flow, which is very good. So the dividend is definitely safe and there's room to grow it in the future. One little cautionary tale I would say about Canadian National Rail is typically it's very tied to the Canadian economy. So they'll do very well when the economy is doing well,

but it'll be not doing as well, not necessarily bad, but if there's a bit of a recession, you may see it in the numbers of Canadian National rails so that's why it's really important and I think Braden shares this to really if you buy these type of companies just to buy them for the long term not one year not two years I would say five ten or as Warren Buffett would say you know forever is his favorite holding period yeah you bring up a good point how it is tied to the economy I don't own the stock I wish I have because it's been nice to dividend growth investors. That being said, my investment thesis on it right now is still kind of what it was before. Yes, this extremely high return on invested capital

dividend aristocrat is very solid. I think 20 times earnings for a company that's kind of cyclical and its performance is expensive. It's not so bad given its proven performance with their financial statements, but that's kind of my thesis on it right now. And it's kind of been that for years now. Yeah, no, I totally agree. I actually have it on my radar to add more to my position as it becomes cheaper. So I did buy it when the P ratio and even the price to cash flow was much cheaper. So I have it on my radar. I think it's a great business. But I think I, as again, Warren Buffett would say, I think his favorite thing to do is buy a wonderful business at a fair price. So that's kind of the reasoning I have for Canadian National Rail.

Once the price gets a bit fairer, I'll definitely add more to my position. Yeah, and it's down almost 8% off its high this year, which is along with a lot of other stocks similar to cn in this space so could be a time to grab it on the pullback i believe i was trading at like 30 times earnings like earlier in the year or maybe that was cp can't remember i think it was cp cp was always quite over like not over value but a bit more of a premium to it. I got it when it was about 14, 15 times earnings around the pullback in December. So I started a position back then. Yeah, I think for a stock like this, to look at something that I think is undervalued potentially in this space would be the trucking company TFI International. It's a $2 billion market cap company that I love to talk about

how good they are at acquiring some struggling assets in the trucking industry, integrating them and making them very profitable. And they're also approaching that dividend aristocrat, They're also approaching that dividend aristocrat, dividend growth, very similar metrics, but at half the valuation. So something to consider, another stock to consider if you're looking at CN Rail would be ticker TFI. It is not a railway, but it's a trucking business. Yeah, I'll definitely put that on my radar. That's about a $2 billion. So you're out of the range of a lot of, we'll call it big smart money.

They limit themselves to $2 billion or $10 billion, whatever they are, based on liquidity requirements. So yeah, it's a good space to be in is that mid-cap market if you're a DIY investor. Yeah, definitely. Any more to add to this one? No, I think that goes over it. Definitely when we look at other companies, we'll dive into a bit more of the nitty gritty. I think it's a good overview. Just give people a bit of an idea what we kind of look after when we're looking to investing in businesses. But no, I think we kind of covered most of it. All right, perfect. So this episode and always, you can go to getstockmarket.com. That is G-E-T stockmarket.com. And you're going to find a list of, including CN Rail and TFI that

we just talked about, a list of the top 50 Canadian dividend stocks that are on the Investable Universe that me and Simon both look at. And you can get your copy right now. The Canadian investor is not to be taken as investment advice. Braden or Simone may own securities mentioned on this podcast. Always make sure to do your own research and due diligence before making investment decisions.