O Canada

One of the best places I have found for income seeking investors to invest is in Canada. Canada is a resource rich country primarily known for its oil and gas reserves. However, what may come as a surprise to some is that Canada is home to much of the world’s corn, peas, wheat, nickel and uranium. In fact, as recently as 2010, the province of Saskatchewan accounted for 30% of the global supply of uranium. Interestingly, too, Canada’s EKATI diamond mine produces 6% of the world’s diamonds, as measured by value.

Canada  has the tenth largest economy in the world and it is one of the world’s wealthiest nations. Its big banks emerged from the 2008 financial crisis largely unscathed, and, at present, the Loonie (i.e. the Canadian Dollar (CAD) ) is quite literally at parity with the U.S. Dollar (1.00450 CAD to 1 USD — click here for updates). This last part is important because of my desire to discuss purchasing Canadian securities on Canada’s stock exchange, the TMX.

Fortunately, for U.S. investors, there is a broad range of Canadian securities that can be purchased on U.S. exchanges as an ADR; unfortunately, though, most are of the large, Blue Chip-like species we have here in the U.S., which don’t offer much in the way of growth. To purchase shares of the lesser known companies (lesser known to many U.S. investors that is) that offer greater growth potential, you will need to make such purchases on the TMX.

Luckily, the process of purchasing foreign securities, and the exchange of foreign currencies, has been made easier by companies such as Interactive Brokers. Once you have received approval (and your account has been authorized) to trade foreign securities and currencies, the act of placing a trade for a foreign security is as simple as any other — it’s just a mouse click away.

When purchasing foreign securities on their home exchanges there are two ways to make — and lose — money. The first is in the appreciation (or depreciation) of the stock’s price. The second is in the appreciation (or depreciation) of the foreign currency. This is where currency risks play a large role, and why it is so important to know where the foreign currency lies in relation to the price of the U.S. Dollar.

As we can see from the chart on the left, since 2002 the Canadian Dollar has tracked the U.S. Dollar from a low of approximately 0.60 CAD to 1 USD to a high of approximately 1.10 CAD to 1 USD. At present, the Canadian Dollar pretty much trades on a one-to-one basis with the U.S. Dollar. This dynamic (i.e. the difference in the exchange rate) is what makes trading foreign securities that much more interesting. Though you can make money on the security itself, you can still lose money if the exchange rate between the currencies (in this case the rate between CAD and USD) goes against you. For this reason, many people shy away from the idea of investing in foreign securities. This way of thinking, however, can be a big mistake for investors.

In the global economy in which we currently live, so many more money-making opportunities are available to investors who are not afraid to invest their hard-earned monies outside the U.S. Lesser well developed countries are constantly striving to reach the same success and standard of living as their wealthier neighbors; and, given that their economies are so much smaller, there is greater potential for growth. Now, I’m not saying that Canada is a less developed nation — far from it. I am, however, trying to say that, as investors, we should not be afraid to invest in countries outside the U.S.

The best part of investing in Canadian companies is that they pay rather healthy dividends — many on a monthly basis, which allows for greater compounding. That, coupled with a strong national currency, provides for some rather enticing investment opportunities. And, as far as the withholding taxes imposed on foreign investors, this short paragraph from Investopedia’s Web site says it best:

Canada U.S. Tax Treaty Should Still Benefit American Investors

For U.S. investors interested in this sector, it’s important to understand that the net amount of the dividend received will depend on the U.S./Canadian exchange, as they are paid in Canadian funds, and the amount of withholding tax charged by the Canadian government on distributions to non-Canadian residents. At present, a tax treaty between Canada and the U.S. limits that withholding tax bite to 15 percent, a portion of which can be recovered from the Internal Revenue Service (IRS) as a foreign tax credit. Read more here.

In sum, Canada offers U.S. investors a host of reasons to consider investing in Canadian companies. It’s stable government, strong currency and vast collection of resources offer investors an array of income producing opportunities.

Note: Currency chart courtesy of insidestocks.com.
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