Generating income from your portfolio Dollars & M Sense any investors make poor investment decisions because of the desire for overloading their portfolio with Canadian dividend-paying stocks. Dividends from Canadian stocks are the current darling of our investment world. However, there are other ways that may be better for generating income from your portfolio. The reason for the rush to Canadian-paying dividends is the dividend tax credit that reduces taxes paid from these dividends. Another way to produce revenue from owning stocks or mutual funds that own stocks is to sell some of the investments. If there is a capital gain, then the favorable tax treatment on that source of revenue can be about as good as receiving Canadian dividends. For investments inside nonregistered plans, only half of any capital gain is taxable. If there is no capital gain on the investment you sell, then there is no income tax paid. You sell $1 and keep the whole dollar without paying any taxes. The problem for most people is the notion you are better served if you can just spend your income and do not touch the capital. This sounds like a good idea, except dividends are just another form of selling investments. There is nothing sacred about dividends. When a company distributes dividends to shareholders, they are effectively selling some of that company in the form of paying out cash. For simplicity, let us assume your investment in a company was worth $1. That company pays you a dividend of ve cents so now the value of your share is reduced to 95 cents. Compare that investment to a similar company that did not pay a dividend. Your investment is worth $1 and if you sold ve cents, your investment would be reduced to 95 cents. This is the same logic. In one case, a company paid a dividend and in the other case you created your own form of dividend by just selling a small number of shares. In the end you are left with a 95cent investment. When you sell stocks or units of a mutual-fund-owning stocks, the money received will largely be a return of capital, which is not taxable. A Canadian dividend is just an- 33 | Thursday, September 25, 2014 | OAKVILLE BEAVER | www.insideHALTON.com THE WEALTHY INVEST DIFFERENTLY. ACCESS THROUGH MANDEVILLE. Peter Watson Guest Contributor other form of return on capital, except all of the dividend must be included for tax purposes. Dividends do not come from earnings, they come from cash held by the company. Do not get dividends confused with the underlying value of a company. Dividends are paid from cash the company has and is not dependent upon pro ts. Many of the most successful companies do not pay dividends. The value of all companies is determined by the market and is based on the market estimates of future cash ow of the company. Nobel laureates Merton Miller and Franco Modigliani said "values are determined solely... by the earning power of a rm's assets... and not how the fruits of the earning power are packaged for distribution." When investors concentrate on Canadian stocks that pay dividends, they are committing a cardinal sin. Their portfolio lacks diversi cation, and therefore is more risky. The irony is the type of investor looking for dividend paying stocks is often more conservative compared to an investor who just wants capital appreciation. Canada represents four per cent of the world capital markets. Diversi cation in other parts of the world is the starting point in any well-constructed portfolio to manage investment risk. We recommend creating the safest and best investment portfolio needed to satisfy your nancial objectives. Once that is done, then determine the best way to go about generating the desired income you need. Constructing an overweighed Canadian stock dividend-paying portfolio is like the tail wagging the dog. Start with the sound fundamentals of diversi cation and the better your portfolio, the better the chance it will meet your income needs. -- Submitted by Peter Watson, MBA, CFP , R.F .P ., CIM, FCSI., Certi ed Financial Planner MICHAEL LEE-CHIN PRESENTS ACCESS 2014 SPEAKER SERIES Tuesday, September 30, 2014 PLEASE JOIN US FOR A SPECIAL PRESENTATION FOR FOR SEATING, PLEASE RSVP WWW.POWEROFACCESS.COM 1-888-990-9155 Seating is limited. We anticipate a large response from our community. PLEASE JOIN US THE PORTLAND HOLDINGS AUDITORIUM 1375 Kerns Road, Suite 100, Burlington, Ontario L7P 4V7 Doors open at 6:30 PM BUSINESS OWNERS hosted by Executive Chairman of Portland Holdings Inc. and Chairman of Mandeville Holdings Inc. MICHAEL LEE-CHIN Mr. Lee-Chin will speak on "Building and sustaining wealth and legacy...A clinical review of the business owner's journey." Commissions, trailing commissions, management fees and expenses may be associated with investments. Products are not guaranteed, their values change frequently and past performance may not be repeated. The Private and Alternative Products being discussed are not publicly offered. They are only available under offering memorandum and other exemptions to investors who meet certain minimum purchase amounts or eligibility requirements such as "accredited investors". Information herein pertaining to the Private and Alternative Products is solely for the purpose of providing information and is not to be construed as a public offering in any jurisdiction of Canada. The offering of Units of the Private and Alternative Products is made pursuant to an Offering Memorandum and the information contained herein is a summary only and is qualified by the more detailed information in the Offering Memorandum. Please read the offering documents before investing. Mandeville Holdings is a registered trademark and Mandeville and its logo is a trademark of Portland Holdings Inc. used under license by Mandeville Holdings Inc., 1375 Kerns Road, Suite 100, Burlington, Ontario L7P 4V7 TEL: 1-888-990-9155 FAX 1-905-331-4245 WWW.MANDEVILLEINC.COM