Second GWO Trade

The markets can have a mind of their own at times … The recent pullback is reminiscent of 2009 when many financial stocks were discounted.

Corp Account Guidelines

A reminder on the account guidelines:

1. Preserve capital by not taking unnecessary risks while not expecting growth, per se.
2. Earn income from the investment with a yield above 5% from dividends or distributions.
3. Keeping up with inflation is not necessary as it’s not a retirement account.
4. No re-investment of income. It will either be used to pay taxes, or withdrawn from the corporation as dividends to myself.
5. Focus on Canadian currency.

The money invested is simply a way to put the cash to work. Banks don't pay interest, and a high-savings account doesn't pay either.

Screening Method

The method I used to screen GWO during my first trade is still valid.

I did, however, double-check for better options. Income trusts or ETFs were currently excluded in my filtering as I wanted to focus on a dividend stock due to the market drop.

The shortlist is the following with a yield close to 6%

• Great West Life
• Power Corporation
• Manulife

I had a look at the banks and only Scotia Bank had a yield near 5% and still not in the attractive territory unlike many of the life insurance stocks.

I opted to stick with Great West Life instead of its parent company or Manulife.

Interestingly, Great West Life was also highlighted as a top pick on BNN last week.

Tax Efficiency

At this point, I have 60% of my initial contribution in dividend stocks while 40% in an ETF which is more tax efficient for a similar yield.

The difference is that Great West Life will increase the dividend over time while the ETF will stay relatively fixed.

It’s a balance and not just a play on tax efficiency.

In a corporate account, capital gains are very efficient and many covered call ETFs pay a return of capital. You get money back without any taxes until you sell and trigger a capital gains.

See the ratios below to understand the actual tax rate of the ETF distribution.

Note that I am still learning about corporate tax for investing … While I have a good handle on personal taxes, it’s my first year doing corporate taxes with an accounting firm. Hopefully, I am not making too many inefficient decisions.

Next Steps

The markets can always make me adjust my plans but my next contribution of $5,000 will be earmarked for an income trust or ETF.