When it comes to foreign dividends, the DIY path could prove costly

Canadian investors seeking overseas exposure face some inconvenient truths, says global equities expert

When it comes to foreign dividends, the DIY path could prove costly

While some Canadian investors may wish to expand their portfolio horizons beyond the Great White North, it takes a certain amount of skill and expertise to navigate foreign markets. And it’s a job that Darren McKiernan takes seriously as a veteran fund manager with over a quarter-century of industry experience.

“I'm humbled that so many Canadian investors, financial planners, brokers, and people that work in this industry have trusted me and my team with the amount of money that they have,” said the Senior Vice President and Head of Global Equity & Income at Mackenzie Investments. “I’d like to think we've earned some of that trust because of our proven long-term track record.”

A successful track record in global dividend investing doesn’t come easy. While Canadian investors will probably have a good awareness of the benefits and performance drivers behind the Big Six banks, it’s a different thing altogether to know and invest in a Europe-based aerospace company, or an Asian stock exchange-listed firm.

Investing in a professionally run strategy, McKiernan argues, takes away the hassle and risks that come with that lack of familiarity. It also creates protection and diversification by gathering dividend and cash flow streams not just from mainstay blue-chip names like Microsoft, but also high-quality businesses that are domiciled across the world.

“If you’re a Canadian investor, probably every investor on your block owns a Canadian bank in some form or another. Should the real estate market soften or some other issue come up creating weakness in banks shares, there’s some ‘psychological comfort’ knowing that others are dealing with the same issue,” he says. “But if you own Novo Nordisk out of Denmark, and that stock declines, you might end up making more sub-optimal decisions because you don’t have that same level of familiarity.”

As expected of professional fund managers, McKiernan does his best to compose letters and commentary to keep unitholders updated on the fund’s performance, as well as the sectors and companies the strategy is exposed to. Those communications provide an extra layer of reassurance for investors, which can go a long way in steering them away from emotional decisions.

Another potential issue investors might face when investing in foreign dividend-paying stocks is tax slippage. If an investor holds a foreign company in a non-registered or a taxable account, they would have to pay a slightly higher tax rate on dividends paid out from foreign companies than if they had invested in a Canadian company.

Certain Canada-domiciled ETFs and investment funds are structured to provide investors cost-effective and potentially tax-efficient exposure to different asset classes, including foreign dividend-paying stocks. But even setting aside that structural optimization, McKiernan believes that with the right strategy, the advantages related to getting access to foreign dividend-paying companies like Microsoft or Nestle offsets the slight cost of tax slippage – and then some.

“I strongly believe you are more than compensated for that tax slippage leverage by owning superior companies that have proven dividend growth track records,” he says. “They’re likely to return a lot more free cash flow to you than what you might lose to potential taxes.”