A taxing endeavour

Given that its tax time, I've spent last two weeks talking taxes with anyone who'll listen. I've never really been mathematically inclined, and filing my return every year serves as an excellent reminder of that. So I generally try to pick the brains of anyone who'll listen, looking for tips for keeping more of my meagre earnings for myself.

In one of those aforementioned conversations, I heard something interesting I felt the need to pass on here. I must admit I don't fully understand it myself (see previous comments re: math skills) but a work colleague was telling me his theory of why its a bad move to keep dividend-producing stocks in your RRSP portfolio. The idea, if I recall it correctly, is that since dividend income is already one of the most tax advantageous forms of income there is, it's sort of a waste to "hide it" in an RRSP where the money will ultimately be taxed at a much higher rate when I redeem it.

The conversation came about because I was telling him I couldn't decide whether to put my return into a Berkshire Hathaway B share as I'd originally planned, or buy some bank stocks for the dividend income. He advised the Berkshire stock specifically because it doesn't pay dividends. He spends his dividend income outside of his retirement account, because it's already tax efficient. He says he only puts mutual funds and ETFs in his RRSP account for that reason, keeping his juicy large cap dividend stocks in a regular investment account. In a sense, he was advocating spending the dividend income as you get it because you've already paid the tax on it.

Has anyone else heard this theory? And if anyone with a background in accounting is reading this, is he right?

...

Postscript Aside from this dividend debate, doing my taxes this year has reminded me of the huge advantages of RRSP's in general. Any twenty-somethings out there, take note: I know they're not sexy, and it's fun to blow all your money as it comes in. But it really does make sense to start an RRSP as early as possible. It actually pays, and I'm starting to see it with my own eyes.

...

Post-Postscript I notice that FP's Jonathan Chevreau's blog entry today closely mirrors the subject of this post. I encourage you to read the article in it's entirety here, but his answer, essentially, is that RRSPs pay. So it's a no brainer for all Canadians to max out their RRSP room every year — whether in equities or elsewhere. As far as dividend are concerned, proposed changes to the way dividend income will be taxed by Ottawa may start to make a difference, and mean it could meake more sense to hold dividend stocks outside the RRSP. But until that happens, every $1 in the RRSP is a good, tax efficient $1.

I told you so...

The surest sign yet that hype over shares in Tim Hortons' has reached a fever pitch?

The birth of a blog devoted exclusively to tracking all the Tim's IPO-related news.

Thanks to Canadian Capitalist for the link.

Stellar performance

In the never-ending pursuit of above-average portfolio returns, I've heard of a lot of truly "out there" gimmicks. But the one I read about in Barron's this morning (sorry I can't find a link to it) takes the cake.

Henry Weingarten has been a mathematician and financial analyst for more than two decades. But he prefers to call himself a financial astrologer. As head of private money manager The Astrologers Fund Inc. Weingarten combines fundamental and technical analysis with astrology to predict stock performance.

I know it sounds hokey, but a perusal of his website reveals he's been dead-on in his predictions — although there's curiously no mention of his misses.

Weingarten is in the news right now because he reckons the total solar eclipse coming on March 29 does not bode well for the markets. On that same day, Pluto will be in stationary retrograde at the galactic centre of the cosmos — the same position Saturn was in before the market crashed in 1929.

It all adds up, Weingarten says, to him predicting with more than 90% certainty that the Dow Jones Industrial Average is set for a tumble, and will sit below 10,000 by June. Considering the DJIA is well above 11,000 now, that's a pretty steep drop. If Weingarten is correct and U.S. stocks are set to shed 10% of their value, you know what I think, don't you?

Sounds like a buying opportunity. :)

If only those B-class Berkshire Hathaway shares I've been lusting after could take a similar spill, I'd be one happy camper.

Party on, Garth!

Though I've never been accused of being on the right wing of the political spectrum, one blogger I always keep an eye on is Canadian MP Garth Turner. The long time columnist and broadcaster's blog is refreshing for the fact that he has thus far managed to avoid censoring himself now that he is a member of the government. (Indeed, he's already landed himself in hot water for some high profile disagreements he's had with the PMO's office.)

Politics aside, on a financial level, Turner has some interesting comments on the looming arrival of the (gasp!) 50-year mortgage to would-be Canadian homeowners like me.

You can read the entry here but the 10-cent version is this: mortgage lenders are only starting to pitch these long-term mortgages because they know that after such an increase is house prices over such a small time frame, owning a home is becomging too expensive for the "average" Canadian family. But the industry depends on a steady supply of new owners, so they pitch these monstrously long mortgages to us to make home ownership seem more feasible, conveniently neglecting to mention that you end up paying way more for the house in the long run.

It's a fascinating read, and refreshing to see in print something I've suspected myself for a long time. I hadn't crunched the numbers myself but Turner argues that under current interest rates, a $300,000 mortgage ends up costing you $580,000 to pay back over the life of a 25-year loan.

I'm in my mid-20s, and I have friends buying condos at the moment. Though the thought of paying down a mortgage to earn equity (as opposed to rent) is very appealing to me, I just don't have the stomach to borrow such a staggering amount of money right now. I know there's a massive marketing machine designed to convince me why it makes sense for me to buy a home as early as possible, but I won't be signing up for one of these ludicrous no-money-down plans. My own benchmark is to try to have a 20% downpayment. Considering a starter condo in a non-hip part of town can cost you upwards of 200K in this city, that means I'm going to need $40,000 before I jump in.

All the more reason to get busy looking for undervalued companies that pay dividends until then, wouldn't you say?

Double Trouble

You could say I'm addicted to my double-double from Tim Hortons' every morning. And you'd probably be right. But despite my predilection for Tim's own brand of hot, brown, sugar-water, I'm still shaking my head at the people clamoring over themselves to get in on the action when the iconic donut chain goes public in an IPO later this month. In bullet form, let me tell you why.

It's a growth story with nowhere else to grow

Yes, yes, we've all seen those lineups outside the stores at 8:45 every morning and thought "man, that place is just a license to print money" but honestly — I have my doubts. There are currently 2,886 Tim's franchises in Canada and the United States. That's a staggering amount — more than the Golden Arches, in fact. I would argue that if they haven't hit it yet, Tim's is very close to complete saturation point in Canada. Any more, and new locations are going to start competing with each other, something sure to anger the franchisees. Furthermore, I can't shake the feeling that the Tim's love affair might be coming to an end. In every industry, people fall in love with a sexy up and comer, before it reaches hegemonic status and people start to resent it for its success. The company launches an advertising blitz with all the newfound money, but overnight, people start to view the new kid on the block as being painfully lame and stuck in the past. They move on to the next big thing, and the stock suffers. It happened to McDonalds. It happened to Wal-Mart. It can happen to Tim's, even in Canada.

If Tim's has anywhere to grow — and that's a big if, IMHO — it's going to happen in the States. Indeed, even before the IPO talk, Wendy's management was talking publicly about wanting to double the number of U.S. Tim's locations by the end of 2007. Well, forgive me for being skeptical. Let's not forget that Tim's has already been in the USA for more than 20 years and they still haven't hit anywhere close to the brand recognition, let alone loyalty, that they have in Canada. We Canucks think drinking at Tim's is an act of patriotism. But Americans aren't seeing the same love story. The US has just as many devotees of Krispy Kreme and Dunkin Donuts as Canada has Timcoholics. And for people who actually like their coffee to taste like coffee, Starbucks enjoys much more loyalty. Although I'm told actual coffee aficionadoes are more prone to find their local independent java house and never leave.

The bottom line? Wendy's is spinning off Tim's at the perfect time, because they realize the chain is at its peak in terms of growth. They're eager to get their hands on the cash, so they can use it to shore up the problmes in their core burger business. I fully expect Tim's to continue to pump out nice, stable revenues for several years to come. But the market will view Tim's as a growth stock, and I'm not so sure that the explosive growth can continue. That's a concern for me. So is this:

The smart money isn't excited

Consider this. US hedge funds like Nelson Peltz' are the ones who pushed for this IPO in the first place, so they could "unlock value" in their sagging Wendy's shares. And despite the fact that Canadian retail investors are the ones most excited about the IPO, the vast, vast majority of shares are being sold through NY-based underwriters. I don't think that was an accident. That, to me, suggests that the institutional investors who will get first crack can't wait to flip their shares to mom and pop investors caught up in the hype. As usual, the big brokerage houses throw retail investors under the bus to make a buck. "Smart money" knows things we don't. Ron Joyce certainly does. He's the man who regrets selling the chain to Wendy's in the first place in 1995 for $600 million. But even he's now come out and said he's not interested in buying a stake at the prices being mentioned. Ron Joyce is one of the richest men in Canada — who am I to disagree with his instincts?

My gut suspects that in the hours, days and weeks that follow Tim's hitting the open market, the action will be fast and furious. Share prices will almost certainly soar well past the IPO price, and I wouldn't be surprised to see capital appreciation well into the double digits.

But ultimately, as Tim's inevitably has to stop the number of new franchises they open (or even, dare I say it, close some break-even U.S. locations) the never-ending growth story Joe Q. Average investor expected will stop, and he'll be crying into his double-double about why his can't-miss investment missed.

My bold-yet-completely-untechnical prediction? A year from now, Tim's shares will be trading at less than the IPO price. And that's when I'd consider buying in.

It's carnie time

the 38th Carnival of Personal Finance is up over at Canadian Capitalist and I'm honoured to be included in it.

Check it out.

Holiday

No posting this week, as I am on vacation. Plenty of other PFblogs to amuse yourselves with.