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investor clinic

I have been watching shares of Shopify Inc. (SHOP) drop lower and lower over the past few months. At what point would you consider it a buy?

Shopify SHOP-T has been an exceptionally volatile stock. Two years ago, it traded for about $500 a share on the Toronto Stock Exchange. It went on to more than quadruple in price, hitting a record high of $2,228.73 in November, before the bottom fell out. On Friday, it closed at $846.65. These dramatic ups and downs tell me two things: 1) Investors have no idea how to value the company, and; 2) Shopify’s share price is driven by momentum trading that is largely divorced from the company’s fundamentals.

But get this: Even after the recent collapse, the shares are still trading at about 185 times the average earnings estimate for 2022, according to Refinitiv. Such a lofty price-to-earnings multiple indicates that huge growth expectations are built into the stock price. If Shopify’s growth disappoints, the stock could be in for more pain.

Adding to the uncertainty, analysts’ price targets are all over the map, ranging from a high of US$1,990 to a low of US$660 for Shopify’s U.S.-listed shares, which is equivalent to about $2,490 and $825, respectively, for the Canadian-listed shares. If analysts can’t agree on where the share price is heading, I sure as heck don’t know.

Given the volatility of individual technology stocks such as Shopify, I believe most do-it-yourself investors are better off sticking with blue-chip dividend growth companies, which are more predictable and generate steady income whether their share prices are rising, falling or going sideways. I still believe it’s important for investors to have exposure to technology stocks, but owning a broad index or sector exchange-traded fund that holds a diversified basket of tech companies is probably a better way to get that exposure.

Last week you wrote about the Hamilton Enhanced Multi-Sector Covered-Call ETF (HDIV), which has a distribution yield of more than 8 per cent. How are the distributions taxed?

Exchange-traded funds publish the tax characteristics of their distributions each year, but you often have to hunt for the information. On the Hamilton ETFs website, go to the main page for HDIV, scroll down to “distributions” and then click on the link for 2021 tax information. You’ll see that HDIV reported total distributions of $0.65188 per unit in 2021, of which $0.10945 was classified as eligible dividends, $0.53168 was capital gains and $0.01075 was foreign income.

Keep in mind that HDIV has only been around since last July, and an ETF’s tax characteristics vary from year to year. Distributions from covered-call ETFs also typically include return of capital, which is not taxable immediately but reduces the adjusted cost base of the investor’s units. Remember, too, that the tax treatment of ETF distributions is only relevant if you hold your units in a non-registered account; in a registered account distributions are not subject to tax.

I hold units of H&R Real Estate Investment Trust (HR.UN) in an account with the REIT’s transfer agent. In January, I received one unit of Primaris REIT (PMZ.UN) for every four units of H&R as part of H&R’s spinoff of Primaris. These new units were put in my account at zero cost. I plan to either sell the Primaris units or transfer them into my tax-free savings account. My question is, what do I use for an adjusted cost basis?

If you refer to H&R’s fourth-quarter earnings release dated Feb. 14, you’ll find the following on Page 7: “Unitholders’ ACB of their [H&R] Units should decrease by 27 per cent as a result of the Primaris Spin-Off. Conversely, unitholders’ ACB of the Primaris REIT units issued on December 31, 2021, should initially be 27 per cent of the unitholders’ former ACB of Units immediately prior to the Primaris Spin-Off.”

Got that? Let me explain it with an example: Say the ACB of your H&R units was $10,000 before the spinoff. The ACB of your new Primaris units would be $2,700 (27 per cent of $10,000). The ACB of your H&R units would fall to $7,300 ($10,000 minus $2,700).

Another important thing to note is that H&R made a year-end special distribution of 73 cents per unit, of which 10 cents was paid in cash and 63 cents was a non-cash capital gains distribution (also known as a reinvested or “phantom” distribution). Investors should increase the ACB per unit of their H&R units by the amount of the non-cash distribution “prior to the apportionment of ACB to Primaris REIT units,” H&R said.

I suggest you contact the transfer agent to ask why the cost basis of your Primaris units is shown as zero.

Finally, remember that, whether you sell your Primaris units or transfer them to your TFSA, you’ll have to pay capital gains tax if the market value of the units at the time of the sale or transfer is higher than your ACB.

E-mail your questions to jheinzl@globeandmail.com. I’m not able to respond personally to e-mails but I choose certain questions to answer in my column.

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