Your questions have been piling up in my inbox, so let’s deal with some of the most interesting.
Investing in Stripe Inc.
Q - I’m wondering what your thoughts are about the company Stripe Inc. I have read some interesting things about it and have a small amount of spare funds that I’m considering investing in it. However, I don’t like to invest outside of your recommendations as I’ve done extremely well following your advice through many years. (My other investments are all ones you have recommended, and I have sidelined additional cash for adding more shares as prices dip.) – Teresa S.
A – Stripe is a San Francisco-based software company that provides complete payments infrastructure for the internet. Its customers include Shopify Inc., Instacart, Microsoft Corp., Amazon.com Inc., Slack Technologies Inc, and Zoom Video Communications Inc. Its platforms support 135 currencies and payment methods. According to its website, 90 per cent of U.S. adults have bought from businesses using Stripe.
What we don’t know is what this means in terms of revenue and profits. Stripe is not a public company, so it is not required to release financial information. Since the shares are not publicly traded, individuals can’t buy in.
Presumably, the company will eventually announce an initial public offering (IPO) and list on a major exchange. There would be an opportunity to buy the stock at that time. But, based on recent hot IPOs, there will likely be high demand which could drive the shares sharply higher in the early days of trading. And the initial pricing will probably be higher than the company’s financials warrant.
I suggest you advise your broker of your interest in the stock and ask to be put on the list in the event he/she gets an allotment (not likely for a Canadian broker so if you have a U.S. contact try there). When the IPO is announced, check the financials carefully and decide whether the share price is reasonable. It probably won’t be. – G.P.
Looking for ETF with U.S. exposure
Q – I’m looking for U.S. exposure ETFs with some income that can be purchased from the Toronto Stock Exchange. I am moving RRSP investments to a RRIF because my age. Any suggestions would be greatly appreciated. - Raymond L.
A – There are hundreds of ETFs with a U.S. focus that trade on the TSX. Some track major indexes, like the Dow or the S&P 500, while others focus on specific sectors of the economy.
If you want broad market coverage, consider the iShares Core S&P U.S. Total Market ETF (XUU-T). It aims to replicate the return of the entire American equity market (small, medium, and large-cap stocks). It’s up 13.3 per cent year to date (as of Nov. 19). Distributions are paid quarterly but they aren’t very large (about 10c cents per quarter). The trailing 12-month yield is 1.4 per cent.
For more cash flow, look at the BMO Covered Call Dow Jones Industrial Average Hedged to CAD ETF (ZWA-T). It tracks the Dow and the managers write covered call options to enhance income. This is not a great fund for capital gains (it is actually down 3.5 per cent for the year to Oct. 31). But it currently pays a monthly distribution of 10 cents a unit, for a projected yield of 5.2 per cent over the next 12 months. – G.P.
Wants opinion on VRIF
Q – What is your opinion of the new VRIF ETF from Vanguard? I’m retired and need monthly income from my LIRA. Also, which dividend ETF do you recommend, instead of picking individual dividend stocks, for a retiree with a mid to low risk tolerance and no company pension? Thanks. - Paul H.
A – VRIF is the ticker symbol for Vanguard Retirement Income ETF Portfolio. It was issued at a price of $25 per unit and started trading in mid-September. At the time of writing, the price was $25.80.
Investors receive a fixed monthly payout of 8.33 cents or $1 per year, for a yield of 3.9 per cent at the current price. That should be sustainable, depending on how the assets perform.
This is a fund of funds, which invests in eight Vanguard ETFs. As of Oct. 31, the asset mix was 54.4 per cent stock funds, 45.5 per cent bond funds, and a small amount of cash. Equity positions were 36.4 per cent in the U.S., 17.9 per cent in Canada, 10.3 per cent in Japan, and 5.2 per cent in the U.K. No other country had a weighting of more than 5 per cent. The top three stock positions were all major technology companies: Apple Inc., Microsoft Corp., and Amazon.com Inc.
The MER is a very reasonable 0.29 per cent.
We have no history to guide us here but based on the concept of this portfolio and the assets it holds, it looks like a reasonable choice for income investors. The roughly 50-50 bond/stock split limits the equity exposure. However, there is always a risk that the fund will not generate enough income to maintain the current rate of distribution. In that event, the payment would either have to be cut or, more likely, the shortfall would be made up by return of capital, which would erode the fund’s net asset value.
As for alternatives, the ETF industry has been slow to offer balanced funds, although more are appearing now. For a pure equity dividend fund, I like the SPDR Dividend ETF (NYSE: SDY). It pays a quarterly distribution, which varies. Over the past year, investors received US$2.827 per unit, for a trailing yield of 2.7 per cent. – G.P.
RRIF with no money
Q – I opened a RRIF this year, but I have not put any money in it. I will be 69 next year. I do not need the money. Because I opened the account, do I have to move all of my RRSP, some, or none into it? – Mike M., Victoria BC
A – Why would you bother to open a RRIF if you did not intend to contribute to it? You are not required to do so until the end of the year in which you turn 71. In your case, that would be 2023.
However, now that you have the RRIF you should do something constructive with it. If you are not drawing income from a pension plan and you are at least age 65, you can claim the 15 per cent pension income tax credit for the first $2,000 you withdraw from the RRIF each year. That’s $300 a year off your tax bill. Your provincial tax credit will add to that.
That means you have to transfer enough money from your RRSP to the RRIF to generate a withdrawal of $2,000 a year. You will be 68 on Jan. 1, 2021. The minimum withdrawal at that age is 4.55 per cent. If you want to stick with the minimum, you’ll need to move about $44,300 into the RRIF. Of course, you could move less than that and take more than the minimum withdrawal to reach $2,000.
If you take action before Jan. 1, you’ll be able to claim the credit on this year’s tax return.
Note that this does not mean the $2,000 is tax free. That would only apply if you are in the lowest tax bracket. But the tax you pay will be much lower.
And yes, it is ok to have both an RRSP and a RRIF at the same time. – G.P.
Q – I’d like your thoughts on a basic approach for my youngest daughter, who is 29 and single. She is saving for a future home purchase and also wants to build an emergency fund. She currently does not have an RRSP.
Most of her current savings are in a regular “high interest” savings account at a bank. She has opened a TFSA at the bank, with only a small amount in it, and also has begun contributing to a Wealthsimple TFSA with automatic monthly contributions. Both are very small, so she has almost all the cumulative room available for TFSA contributions.
Would you advise having investments for saving towards a future home purchase and emergency funds in the same TFSA? I was thinking of a few high dividend stocks, (e.g. BCE, Telus, Fortis, RBC). Would that be liquid enough to serve as emergency funds, or should she have a portion of high interest savings only for the emergency portion? The other question would be whether to subscribe to DRIPs if available for the stocks, or let the dividends accrue to the emergency cash?
I understand you can have several TFSAs at different institutions, as long as you keep track of your total annual contribution limits, so would the emergency cash portion be better held somewhere like Motive Financial? – Paul P.
A – There are several questions here so let me address each in turn.
First, TFSAs. Yes, legally you can have as many plans as you wish. In practical terms, I don’t advise multiple plans. It may not be a problem now when your daughter has lots of contribution room but in future years it may become more difficult to keep track of how much room is available if you have multiple accounts. I would limit the total number of accounts to two at most, and preferably one.
For the house saving portion, your idea of high-quality dividend stocks would work well. I would use DRIPs to gradually increase positions in each company. I can’t comment on whether that would produce a better return than the Wealthsimple TFSA because it depends on the asset mix selected. However, she would have more control by choosing her own stocks. It comes down to how active she wants to be in managing her money.
As for the emergency fund, how much does she need? She has no dependents who rely on her for support. Presumably, she wants to protect herself against job loss, which is certainly a concern these days. In that case, I think a fund equivalent to six months take-home pay would be adequate.
I would not invest this money in the stock market. Even blue-chip stocks fall when the market crashes, as we saw in March. Keep the money in a high-interest savings account. Motive Financial offers 1.55 per cent in a TFSA, the same as in its non-registered Savvy Savings Account.
If your daughter doesn’t think it might create problems in the future, she could use a Motive Financial TFSA for the emergency fund and Wealthsimple or a self-directed plan for the house. Alternatively, she can ask about investing a portion of her Wealthsimple TFSA in cash and see what rate they offer. - G.P.
If you have a money question you’d like me to answer, send it to email@example.com and write Globe Question on the subject line. I can’t guarantee a personal response, but I’ll reply to the most interesting questions in this space.
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