Dividend stocks can be a great way to grow your portfolio, but sometimes finding the best investments means looking beyond U.S. borders.
Here, I'll look at four of the best dividend stocks from Canada to give investors a look at what opportunities lie north of the border.
Canada is a natural-resource-rich country, and it needs a way to move these resources to where they can be best used. Fulfilling much of this need is Canadian Pacific Railway (NYSE:CP), which has existed since the 19th century and constructed Canada's first transcontinental railroad.
Today, CP Rail remains Canada's second-largest railway company, and although its passenger service has ended, the freight business is booming. Shares are up 35% this year on the back of growing profits and expectations of continued future growth.
At 0.62%, the dividend from CP Rail is pretty small but could be increased over the next few years. Analysts reporting to Nasdaq estimate earnings will grow 30% in 2015 and about 20% per year in 2016 and 2017. With a payout ratio of only 0.22, CP Rail could reward shareholders with both earnings and dividend growth.
Shareholders of Canadian banks fared much better than those of U.S. banks during the recent financial crisis, and Canadian banks are worth a look for dividend investors today. The Canadian banking system is built around five major banks that dominate the Canadian market and have international reach as well.
For those looking for a diversified bank with an international footprint, Toronto Dominion Bank (NYSE:TD) is definitely worth a look. Not only is TD a major bank in Canada, but it also has major U.S. operations, with the slogan "America's Most Convenient Bank."
In the U.S., TD offers retail banking but also owns a stake of about 40% in TD Ameritrade, a major discount brokerage firm. TD also made a move into the auto financing market when it purchased Chrysler Financial back in 2010.
Investors in Toronto Dominion Bank currently receive a dividend yield of 3.3%, beating that of all four major U.S. banks.
Canada has two major airlines: WestJet Airlines (NASDAQOTH:WJAFF) and Air Canada. Air Canada has undergone a massive recovery, and I remain bullish on its shares. However, Air Canada doesn't currently pay a dividend, and WestJet has many attractive aspects as well as a dividend.
WestJet has grown over the past decade to fill the role of a discount airline and competitor to Air Canada in the Canadian market. Currently it doesn't fly much of North America, but that's beginning to change as the airline begins a trans-Atlantic expansion plan. So far, WestJet has launched a flight between St. John's, Newfoundland, and Dublin, Ireland, and moved to acquire four Boeing 767 aircraft.
Those Boeing 767 aircraft will initially serve a route between Alberta and Hawaii but are on track to operate flights to new overseas markets by mid-2016.
At 1.6%, WestJet's dividend is pretty strong for an airline, and while the airline business is above average in risk, WestJet is poised for long-term growth.
Insurance and investments
The CEO of Fairfax Financial Holdings (NASDAQOTH:FRFHF), Prem Watsa, is often referred to as the Warren Buffett of Canada. Both seek out undervalued investment opportunities, both have registered outstanding investment returns, and both are heads of insurance companies.
Like Berkshire Hathaway, Fairfax Financial sells insurance but also has a substantial investment portfolio largely made possible by the insurance premiums it collects. Fairfax specializes in undervalued contrarian investments, taking stakes in Bank of Ireland, Eurobank, and BlackBerry. Bank of Ireland proved to be a multibagger, Eurobank is about even with high future expectations from Watsa, and BlackBerry is in the red for now, but the story isn't over yet.
Unlike Berkshire Hathaway, Fairfax Financial does pay a dividend. At just under 2%, the company's dividend is on par with that of the S&P 500 but comes from a solid company with a sound investment approach.
Watch out for taxes
International dividend investing carries its own set of tax implications. Most countries have a dividend withholding tax to prevent too much cash from leaving domestic companies. But the U.S. and Canada have a tax treaty that keeps this rate at 15% for U.S. investors, and U.S. investors may be able to claim a tax credit on their U.S. taxes. In certain cases, you may have to fill out Canadian Revenue Agency form NR301 to prove your eligibility for the 15% rate.
Canada also carries an exemption from dividend withholding tax for shares held in IRA accounts, making Canadian dividend stocks an international investment worth considering for tax-deferred accounts. However, make sure your brokerage firm is aware of this exemption, as some withhold parts of dividends anyway.
Because there are so many variables in individual taxes, it's best to consult a tax professional who will be able to explain the law and help you understand your unique situation.
Best dividend stocks
Canadian dividend stocks allow investors to diversify their portfolios internationally while taking advantage of some opportunities not found domestically. CP Rail, TD Bank, WestJet, and Fairfax all offer attractive combinations of dividends and growth, making them worth a further look for dividend growth investors.