What is your thinking on the markets? Have we seen the worst of the pandemic selling and do you think now is a good time to acquire stocks?
Normally, I don’t try to predict what stock markets will do in the short run. However, with the coronavirus showing no signs of slowing down in North America, I believe it would be wise to prepare for the possibility that business shutdowns and social-distancing measures could remain in place for several months. This could lead to continued volatility on the stock market until there is some clarity on when the pandemic will recede.
As always, the best approach is to stay diversified by holding a mix of high-quality stocks, fixed-income investments and cash. If your time horizon is years, not months, selectively buying stocks now may prove to be a good move. But it’s also possible that there may be even better buying opportunities ahead. So proceed with caution.
I am 70 years old and retired. The average cost base on my Royal Bank shares, which I bought years ago in my registered retirement savings plan, is $56.57. I’m thinking that if the share price continues to fall it would be a good idea to sell the shares in my RRSP, withdraw the money and buy the shares in my non-registered account with the after-tax proceeds and some cash that I have. Then, as the share price goes back up to $100, for example, when I eventually sell the shares only 50 per cent of the capital gain would be taxable, whereas 100 per cent of the gain inside the RRSP is taxable. Is this a good strategy?
The fact that the share price of Royal Bank (RY) has fallen recently is irrelevant, as is the cost base of your shares. What you’re essentially asking is whether it’s better to invest inside an RRSP or outside. The answer is that investing in an RRSP will almost always produce superior after-tax returns compared with a non-registered account. As I have explained in previous columns (google “John Heinzl RRSP myths”) the notion that 100 per cent of RRSP gains are taxable is a misconception that arises because people fail to differentiate between pretax dollars (inside an RRSP) and after-tax dollars (in a non-registered account).
What’s more, if you make an RRSP withdrawal you will have to pay withholding tax. The withholding tax rate is 10 per cent on RRSP withdrawals up to $5,000, 20 per cent on amounts above $5,000 up to $15,000, and 30 per cent on amounts over $15,000. (Withholding rates are lower in Quebec.) Depending on your marginal tax rate, you may have to pay additional tax when you file your return.
Also consider that you will have to convert your RRSP to a registered retirement income fund no later than Dec. 31 of the year you turn 71, which for you is not that far off. You will then be required to begin making mandatory minimum RRIF withdrawals the following calendar year. The nice thing about RRIF withdrawals is that, as long as you withdraw only the minimum, the amount is not subject to withholding tax. The withdrawal still counts as taxable income, however.
For these reasons, you may want to think twice before selling Royal Bank shares in your RRSP, withdrawing the funds and buying the shares in your non-registered account. Converting your RRSP to a RRIF and making minimum withdrawals might be a better way to go.
In surveying the recent carnage, I was looking at my Telus (T) shares and my broker was showing the yield at 2.66 per cent. What happened? I realize there was a stock split but assumed both the stock and dividends would both be halved, leaving the yield the same. Shouldn’t the yield be much higher?
After a company splits its shares, it sometimes takes brokers and financial websites a few days to catch up. For example, when Telus’s split became effective on March 17, some websites showed that the price was down by 50 per cent! Evidently, these websites hadn’t adjusted their historical Telus stock-price data to account for the split. The timing of this mistake was unfortunate, as it only added to the sense of panic investors were feeling as markets were tumbling on worries about the coronavirus.
Apparently, your broker didn’t adjust Telus’s dividend data, or did so incorrectly. I can assure you that, on a post-split basis, Telus’s next quarterly dividend – payable on April 1 – is 29.125 cents a share (or $1.165 annually), which is half of the previous quarterly dividend of 58.25 cents. Based on Telus’s closing stock price of $21.25 on Friday, the correct yield is 5.5 per cent, which is a lot better than the 2.66 per cent indicated by your broker.
E-mail your questions to jheinzl@globeandmail.com. I’m not able to respond personally to every e-mail but I choose certain questions to answer in my column.