A few years ago, I first became aware that one can donate stocks to charities. As I was just beginning to manage our portfolio any article that mentioned stocks was eagerly devoured, but this concept sunk into my heart. I have been eagerly awaiting the time when I would be ready to embark on this process.
Today the experiment began when I opened my first taxable trading account and funded it with $6000. This amount represents the $500 we donate monthly to one of our favorite charities and what we would normally donate throughout 2014. My plan is to grow the money and donate it in two parcels sometime during 2014.
When I first read the article which detailed the benefits of charitable donations of securities, I was immediately hooked. Instead of just giving $6000 over the course of a year, what if I could grow it a little first? The charity receives a larger gift, and I receive a larger charitable donation receipt to claim on my taxes, without incurring taxable capital gains.
The rules for charitable donation of securities are that any common stock, unit of a mutual fund, government savings bond, or interest in a segregated fund, can be donated to a registered charity with an inclusion rate of zero, provided you did not receive an advantage in respect to the gift. An advantage is defined by Canada Revenue Agency as "any property service or compensation, use or any other benefit that you are entitled to as partial consideration for, or in gratitude for, the gift."
But what if the stock I choose loses money? In this case I will simply sell the stock on the market, take my lumps and claim the capital loss against my income. As I still intend to donate a minimum of $6000 to the charity, I will need to make up the difference either in the growth of the other stocks, or in cash from my pocket.
Another benefit for me in owning stocks in a taxable account is the Canadian Dividend Tax Credit. As the corporation has already paid taxes on the dividends they are paying to investors, the government allows a tax break in the form of the Dividend Tax Credit to investors who receive dividends as income in a taxable account. If the stocks I intend to donate pay dividends, I will be eligible for the dividend tax credit on the dividends I receive.
Here's my current strategy: I will divide my $6000 between two stocks of recommended companies who are currently beaten down in their share price. These are very different from my dividend-growth strategy names.
Because this is a Canadian taxable account, I would prefer Canadian companies or I will be subject to withholding tax on any dividends. As this withholding tax is claimable on my taxes, it really is not a big deal, but why incur taxes if it is not necessary.
Because I am looking to hold these companies for only approximately one year, I would like to buy within sectors that are irrationally mis-priced. Commodities have been hit hard lately and two sectors in the Canadian market that have been dramatically beaten down are the oil and gas sector and the precious metals sector.
Though some oil and gas companies deserve their current valuations, many do not. The spread between Brent and Edmonton prices is narrowing and the expectation of Keystone XL Pipeline being approved and further into the future, the Northern Gateway, will be catalysts in the coming month. There are quality companies with quality assets and quality management teams whose share price has been suffering undeservedly along with the sector as a whole. Several names come to mind, but I have narrowed my choices down to two. According to Eric Nuttall, portfolio manager with Sprott Asset Management, who is my main source of information for the Energy sector, oil and gas stocks "have reached their 'puke point'" and are "massively out of favor". This makes me quite interested! "The massive wave of selling that we've seen is over, but we just don't have the buyers. But when the buyers eventually come in....we could have pretty explosive upside in some of these names."
Legacy Oil Plus Gas (OTCPK:LEGPF) is a company I own personally and have felt the pain of watching my share price cut in half. Each day when I look at the price, I wonder if I should sell, but I know if I was looking at it now for the first time, I would be buying, so I'm still holding and may buy a little more for my personal portfolio as well. The company is currently trading at only four times next year's cash flow and half of book value. Mr. Nuttall says that it can grow by 12% or grow by 5% and pay a 7% dividend and thinks management may initiate a dividend next year. The Canada Pension Plan has recently invested two hundred million dollars into this company after months of due diligence, so my few thousand dollars should be in good company. 11 analysts consider it a "buy", 1 a "hold" and 3 a "strong buy."
Crescent Point Energy (OTCPK:CSCTF) has been long considered one of the best companies in the oil and gas space in western Canada and is a close competitor to Legacy. It has a dividend of 7.79% and has been severely beaten down. I own a position for myself in my dividend growth portfolio. I am leaning towards this one as my primary choice as it is larger, more well-known company, with a large dividend,which will generate a dividend tax credit for me. 14 analysts consider it a "buy", 3 a "hold" and 3 a "strong buy".
I don't think the oil and gas sector has seen it's bottom yet, though I could easily be wrong. I will be watching with the plan to buy if there's another drop in May or maybe wait for a summer slump.
There are two attractive companies in the gold sector that come highly recommended; Goldcorp (GG) and Yamana (AUY). In some ways it does not matter which I choose. The gold producers tend to trade fairly closely together. If I choose the largest company, Goldcorp, it will have slightly less dramatic swings but also a smaller dividend. What I'm hoping for is a nice long, somewhat steady, upswing, which has me leaning towards Goldcorp. However, YRI has the largest dividend at 2.72%. Both are trading around book value and have the vast majority of analysts rating them as "buy". Goldcorp: Underperform:1, Hold:1, Buy:8, Strong Buy:3. Yamana: Underperform:1, Hold:1, Buy:11, Strong Buy:3. A strong correction in the markets later this spring could have investors fleeing to precious metals for safety. What do you think the chances of gold stocks recovering for a nice gain sometime in the next 12-20 months?
Which would you choose? Legacy or Crescent Point? Goldcorp or Yamana? Do you have a favorite value play in another sector that has some upcoming catalyst that would make a nice investment for a donation account?
Disclosure: I am long GG, OTCPK:LEGPF, OTCPK:CSCTF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.