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Buying the Stocks and ETFs

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Financial Planning -> Stocks, Bonds etc. -> Borrowing to Invest -> Buying the Stocks and ETFs

Buying the Stocks and ETFs When Borrowing to Invest

You have to be more careful when buying stocks outside your RRSP, because when you buy and sell stocks in a non-registered account, there are tax consequences to consider.  Therefore, you want to buy good quality stocks and ETFs that you can hold forever (buy and hold).

When borrowing to invest (leverage), you should not invest a large amount all at once.  Make your purchases periodically (monthly, quarterly) over a number of years.  This is called dollar cost averaging, and reduces volatility.  Stocks and ETFs normally increase in value slowly over time, but they also seem to crash at least once a decade.

When you are buying stocks and ETFs in a non-registered account you have two choices

bullethigh dividend paying Canadian stocks/ETFs eligible for the enhanced dividend tax credit
bullet These are good choices for everyone.
bullet If you are in one of the lower tax brackets, receiving these dividends can actually reduce your taxes payable in most provinces/territories.
bullet If you are older, nearing retirement, and need income from the investments, you will want to have more Canadian stocks/ETFs, because the tax on these dividends is much lower than on foreign dividends.  Since the stocks are paying high dividends, they will usually have lower capital gains.
bullet These stocks will usually be in the financial and utility sectors.  In order to not get overloaded in one sector, you should be selling this sector of stocks in your RRSP/RRIF while you are purchasing them outside.  See our chart on the World Economy by Category, and try to keep 20 to 30% of your investments in each of the four sectors.
bullet Canadian or foreign stocks/ETFs which generate low or no dividends
bullet These are good choices for some people.
bullet If you are many years from retirement, and don't need the income, you might be better having these investments, which generate more capital gains and less dividends.
bullet There will be no tax on the capital gains as long as you don't sell anything.
bullet Once you are retired, you will probably have to sell stocks to generate income.
bullet If you are buying stocks that do not pay dividends, read the article regarding interest expense on money borrowed to purchase stocks, to ensure your interest will be deductible.

Previous:

bullet Methods of borrowing
bullet Setting up the brokerage account

Next:

bullet What to do with the dividends
bullet Selling the stocks and ETFs

 

Tax Tip:  Buy good quality stocks and ETFs, and plan to hold them forever.

 

Revised: September 19, 2017

 

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