How to avoid currency conversions on US Dividends
You learn something new every day. A reader commenting on the Canadian Couch Potato blog here revealed two possible ways on avoiding currency conversion on US dollar dividends received in a self-directed RRSP account. The first of these methods works at TD Waterhouse (my review here), where the reader holds his accounts but it should be applicable at any broker who washes trades by setting the buy and sell exchange rates to the same value.
Note that unless you have a substantial sum invested in US-listed ETFs, you won’t save all that much by avoiding currency conversions on dividend payments. For example, the Vanguard Total Market Index Fund (VTI) has a dividend yield of 2%. If you have $100,000 invested in VTI, your annual dividends will be $2,000. Assuming currency conversion charges run the typical 1.5% each way, avoiding these conversions entirely will save you between $30 and $60 annually.
Enroll in a Synthetic DRiP
Unfortunately, an investor enrolling in a synthetic DRiP would incur double the currency conversion charges. See this post for details.
Synthetic Dividend Reinvestment Plans (DRiPs) offered by many discount brokers allow investors to reinvest dividend payments into whole shares of a stock or ETF. It turns out that when you sign up for a DRiP offered on a US-listed stock or ETF, any dividend payments are held in US dollars and used to purchase whole shares of the stock or ETF. The exchange rate on the US dividends and the stock purchase are set to the same value, effectively eliminating USD-CAD conversions.
Wash dividends into a US Dollar Money Market Fund
Unfortunately the author is unable to confirm that TD Waterhouse clients are able to avoid forced foreign exchange conversions. The author was clearly told by client service representatives that washing US Dollar dividends is not possible.
The reader said that TD Waterhouse offers a second method of avoiding foreign exchange conversions on dividends received from US-listed ETFs. A client can call one day prior to the dividend payment and wash the US dollar dividends into TDB166. However, a quick call to TD Waterhouse revealed that the broker will not wash dividend payments into the US Dollar Money Market account. That’s a shame. As an investor who prefers to accumulate dividends in cash and reinvest it in an asset class that is below target, I would have liked to employ this method and avoided the forced currency conversion.