Currency Conversion

Canadian Stocks Paying US Dollar Dividends

August 22, 2012

33 comments

Imagine for a moment that Joe Canadian purchases shares in Encana (TSX: ECA) on the Toronto Stock Exchange. Joe holds the stock in the CAD side of a taxable investment account. It so happens that Encana, like many other Canadian resource companies pays dividends in US dollars. When Joe receives Encana dividends in his account, his broker will charge a hefty foreign exchange conversion fee and deposit Canadian dollars into Joe’s investment account.

The disclosure of exchange fees charged on dividends received in a currency that is different from that of the holding account leaves much to be desired. TD Waterhouse, for instance, adds the note “CONVERT TO CAD @ x.xxx” to such dividend payments in the activity screen but if you look at the monthly brokerage statement, there is no indication that dividends were converted and foreign exchange fees charged. Therefore, Joe might remain blissfully unaware that a foreign conversion fee is being charged on dividends that he receives.

Fortunately, Joe can take some steps to avoid at least some of the foreign exchange fees on his dividend payments. If a Canadian stock pays dividends in US dollars, Joe can contact his broker and request the shares be journaled to the USD side of the account. Dividends received after the shares are journaled will remain as US dollars and will be credited to the USD investment account. The reverse is also true. If a stock purchased on an US exchange pays dividends in Canadian dollars (Canadian banks are a good example), Joe can avoid currency conversions by journaling the shares to the CAD side of the account. If Joe holds all his accounts at a brokers who is able to segregate CAD and USD holdings in registered accounts such as RRSPs and TFSAs, Joe may be able to avoid these forced foreign exchange conversions altogether.

The TSX website is good place to check the currency of the dividend payments. The following Canadian stocks pay dividends in US dollars (the list is courtesy of a Canadian Money Forum member):

Agrium Inc. (AGU)
Barrick Gold Corp. (ABX)
Brookfield Asset Management Inc. (BAM.A)
Brookfield Infrastructure Partners LP (BIP.UN)
Brookfield Office Properties Inc. (BPO)
Brookfield Renewable Energy Partners LP (BEP.UN)
Constellation Software Inc. (CSU)
Encana Corp. (ECA)
Goldcorp Inc. (G)
IAMGOLD Corp. (IMG)
Inmet Mining Corp. (IMN)
Kinross Gold Corp. (K)
Magna International Inc. (MG)
Methanex Corp. (MX)
Open Text Corp. (OTC)
Potash Corp. of Saskatchewan (POT)
Silver Wheaton Corp. (SLW)
Talisman Energy Inc. (TLM)
Thomson Reuters Corp. (TRI)
WaterFurnace Renewable Energy Inc. (WFI)
Yamana Gold Inc. (YRI)

Comparing Currency-Hedged and Unhedged Holdings

January 16, 2012

8 comments

In the past couple of updates on the performance of currency-neutral funds, we found that these funds do not quite live up to the expectation of removing the effects of currency fluctuations for a modest cost. Instead the currency-neutral funds show a performance lag ranging from 2.33% for the iShares S&P 500 CAD-Hedged ETF (TSX: XSP) to 1.30% for the iShares MSCI EAFE CAD-Hedged ETF (TSX: XIN) (See posts Performance of Currency-Neutral S&P 500 Index Funds and Performance of Currency-Neutral MSCI EAFE Index Fund).

Reader Cal wondered how the lag would affect an investor who wants to invest $10,000 in US stocks and has the option of simply picking XSP versus converting to US dollars, buying IVV and after 25 years converting back to Canadian dollars. Since there are a number of variables, I constructed a spreadsheet to play around with the following variables:

– the term of investment (in years)
– annual returns
– Currency-hedged fund tracking error
– Currency conversion cost
– size of currency appreciation / depreciation over the investment term

For a 25 year term, annual returns of 7%, currency-hedging lag of 1.5%, one-way currency conversion cost of 1.5%, we find that (no surprises here) not hedging is advantageous if the foreign currency appreciates or remains the same against the Canadian dollar.

Under these assumptions, due to the large annual performance lag of currency-hedged funds, currency hedging turns out to be unprofitable even when the foreign currency depreciates by 25%. It is only when the foreign currency depreciates by 30% or more that the currency hedged fund comes out ahead. If the depreciation is 50%, the currency hedged fund has an advantage of 31% over its unhedged counterpart.

The spreadsheet will allow you to play around with the variables. For instance, if you use Norbert Gambit to convert currency, your costs might be as low as 0.2%. And if the performance lag of the currency hedged fund is 2% then not hedging is advantageous even at a depreciation of 35%.

The spreadsheet is available here.

TD Waterhouse and US Dollar Dividends in RRSP Accounts

November 16, 2011

6 comments

TD Waterhouse used to be a leader at offering innovative features at least among bank-owned brokerages. They were the first to offer wash trading as a way around avoiding forced currency conversion charges in RRSP accounts. They were also the first to lower trading commissions to $9.99 for clients with accounts above a certain threshold. But recently, TD Waterhouse has gotten complacent. While RBC Direct and BMO InvestorLine have introduced the ability to separate US Dollar holdings in RRSP accounts, TD Waterhouse has not follow suit. As a result, TD Waterhouse has now slipped to the bottom half of the pack in the Globe and Mail’s Annual Discount Broker Rankings put together by Rob Carrick.

One could argue that separate US Dollar RRSP accounts are less of an issue at TD Waterhouse because a client can take advantage of automatic wash trading these days and completely avoid currency conversion from US dollars to Canadian dollars and back when selling and buying US dollar denominated securities. However, there still remains the issue of forced conversion of US dollar dividends received in RRSP accounts. For instance, an investor owning a US stock that pays a 4% dividend is losing 8 basis points or so (assuming currency conversion costs 2%). If the investor turns around and buys another US stock and converts currency at the retail rate, it will cost her another 8 basis points for a total of 16 basis points. The same investor could have avoided the currency conversions entirely if she had transferred her account to a competitor offering US Dollar RRSP accounts.

It is possible that TD Waterhouse is saddled with legacy systems that make it difficult to offer completely segregated US Dollar RRSP accounts. But they should try and offer clients a way to avoid forced conversions of US dollar dividends into Canadian dollars. They can do so by either waiving the retail markup on foreign exchange conversions for US dollar dividends or allowing clients to wash US dollar dividends into the TD US Money Market Account (TDB166). Otherwise, current TD Waterhouse clients might be tempted to take their business to more nimble competitors.