Why Canadian Investors Should Consider Investing in U.S. Stocks
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Did you know that there is a psychological bias that costs investors billions of dollars each year?
Known as “home bias,” this tendency causes investors to prefer their home country’s equities over foreign stocks. Although domestic dividends are taxed less than foreign ones, this tax advantage only justifies overweighting domestic stocks, not buying them exclusively.
The typical foreign withholding tax is 15%. The lack of this tax perhaps justifies overweighting Canadian stocks by 15% relative to foreign stocks. That’s it. You absolutely need global stocks in your portfolio. Especially U.S. stocks. A well-diversified portfolio is a global portfolio, and the U.S. is the “global” market that Canadians are most familiar with. So, it’s a logical place to start. With that in mind, here are two good reasons to consider investing in U.S. stocks.
Strong capital appreciation
The U.S. tech sector is home to dozens of globally dominant companies with high growth, high profit margins, and the potential for high capital gains. Consider NVIDIA (NASDAQ:NVDA), for example. It’s a U.S. chip company that has grown its revenue by 200% and its earnings by 800% in the last 12 months. It goes without saying that the company is growing rapidly. It’s also very profitable, with a 53.4% net profit margin and a 37% free cash flow margin. It’s a strong company that you will want some exposure to, if not directly, then at least in the form of an S&P 500 index fund.
Dividends aplenty
Although U.S. stocks aren’t exactly famed for high yields, some individual U.S. stocks have ultra-high yields. Take Oaktree Specialty Lending (NASDAQ:OCSL), for example. It’s a U.S. lending company with a sky-high 11.3% dividend yield at today’s prices. The stock is cheap, trading at 7.98 times earnings and 1.01 times book value. It benefits from the current high interest rates in the U.S., as it lends money.
Thanks to the Federal Reserve’s interest rate hikes, OCSL was able to grow its revenue by 28% and its earnings by 737% over the last 12 months. Many banks made money off the Fed’s rate hikes, but others failed. Unlike the failed banks, OCSL finances its loans with bonds, so it doesn’t face the risk of deposit flight. This makes the stock an intriguing alternative to investing in the big banks.
Canadian stocks with U.S. exposure
If you read the above paragraphs, you might feel that U.S. stocks are enticing. They have a lot to offer! However, U.S. stocks do expose you to some foreign exchange risk. If you are concerned about that risk, you could invest in Canadian stocks that have U.S. exposure.
Toronto-Dominion Bank (TSX:TD) is a good example to work with here. TD’s U.S. business is the ninth-largest bank in the United States. TD Bank branches can be seen all over New York City and elsewhere on the East Coast. The company’s U.S. investment banking segment has grown its fees by 10.6% per year over the last 10 years. About 40% of TD Bank’s total profit comes from the United States.
TD stock is not without its risks. It is currently in the midst of a fentanyl money-laundering scandal that is expected to cost it $2 billion in fines. If the fines go beyond what’s expected, then TD stock could be down for a long time to come. The company has a lot of things going for it, though, and its 5.51%-yielding dividend appears fairly safe. On the whole, TD Bank appears to be a fairly good Canadian company with plenty of U.S. exposure.
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Fool contributor Andrew Button has positions in Toronto-Dominion Bank and Oaktree Specialty Lending. The Motley Fool recommends Nvidia. The Motley Fool has a disclosure policy.