Identifying Potential Stock Investments Through Demographic Trends and Everyday Awareness

If you are a Do-it-yourself investor (“DIY”) or have a “play account” (while your investment advisor/manager invests most of your money), you are likely always looking for potential stocks to invest in (well maybe not the last few weeks ☹).

People use various methods to identify stocks, from reading business newspapers and magazines, to subscribing to investment newsletters and monitoring stock chat forums etc.

Once a stock is identified, many people run the company through stock criteria filters (utilizing various earnings methodologies, revenue, dividend history, PE ratio’s etc.), read financial statements and Management Discussion and Analysis and any other number of due diligence methods to determine if any given stock meets their investing criteria.

 
Today, I want to discuss using demographic trends and everyday insights to identify stocks that you may considering investing in.

Demographic Trends

Earlier this year, I virtually attended Outlook 2022, a roundtable discussion hosted by Wealth Stewards Inc. a full service planning and investment firm. The roundtable participants discussed the economic and stock market outlook for 2022. There were also discussions on tax, real estate and demographics.

I found the discussion with Kenneth Gronbach, a well-known American author and demographic specialist very enlightening. Ken somehow makes the complex topic of demographics, easy to understand.

During his presentation, Ken gave a couple examples of how demographics may play out in the future. In his first example, he noted that the sales of eyeglasses are to a large extent driven by Presbyopia (which is essentially our eye's ability to see things up close getting worse as we age, typically starting at 40-45 and older). He noted that optometrists generally resolve Presbyopia by simply prescribing reading glasses.

Ken noted that the largest generation in history of the United States are millennials born 1985-2004 who are currently 18-37 and heading to the age where Presbyopia will be prevalent. So, if you sell eyeglasses, and look down the time continuum, you will know there should be a lot of business heading your way. In the same way this demographic information is good for an eyeglass manufacturer, this information is also very useful for an investor who is looking for companies that will have strong markets in the coming years.

He also discussed that in the United States, demographic data suggests that due to the population size of the millennials, there will be a housing shortage of 25 million housing units over the coming years, despite the fact the Baby Boomers will be selling. I was a little surprised to hear this, as personally I had thought the opposite, that baby boomers would be selling into a market with limited demand.

Ken also noted the human body typically starts to fall apart at 75 (for me it was 55 ☹). Because of the size of the baby boomer (1946-1964) population and the wealth many Baby Boomers have, there will be a critical mass of money and motivation to put towards health care. This would be very important demographic information for the health care industry and someone looking to invest in health care.

If you listen to the round table, Mr. Gronbach has other examples. However, the key take-away is that demographic information is not only useful for end sellers, but it can also be used by investors, especially by those who invest with longer time horizons to identify potential stock and/or sector investments.

Economic Trends

Following Mr. Gronbach, Nick Griffin of Munro Partners spoke. He is the founding partner and chief investment officer of Munro and has been managing global long / short equity mandates for over 15 years.

Mr. Griffin spoke about economic trends, such as cloud computing, climate change and silicon demand. He feels that silicon and semi-conductors will be huge in the coming years. He bases this on the fact semi-conductors drive the digital economy and human progress.

Whether he is correct or not will not be determined for several years, but again as an investor, if you agree with Mr. Munro’s assessment, the “trend will be your friend”.

Everyday Awareness

Peter Lynch was the director of Fidelity Magellan Fund from 1977-1990 and is almost as revered as Warren Buffet for his ability to pick stocks. In one of his books Beating the Street, Mr. Lynch suggested average investors can beat Wall Street professionals by using information they encounter in their everyday lives. He told the story of how he invested in Hanes (for those old enough to remember, Hanes pantyhose were made famous by the TV advertisement featuring New York Jet Joe Namath in panty hose) after his wife told him about the popularity of L'eggs pantyhose amongst all her friends.

Even though the advice is over 30 years old, it is still as relevant today as ever. As an investor, using day to day information could mean observing a company/sector you deal with in your job that is rapidly expanding (assuming your company does not have any prohibitions about purchasing shares of supplies or customers and it is not insider information) or seeing the use of Artificial Intelligence grow in your industry. A simple example of everyday awareness over the last 15-20 years would have been watching your kids plead for iPods, then ipads and finally iPhones. Ever parent should have invested in Apple if we were paying attention.

It is interesting how we observe day to day trends, but often we do not take advantage of these observations when making our investments.

Please note: I am not an investment advisor, and I am not suggesting the use of any one particular investment identification methodology or the purchase of any particular investment.

The above blog post is for general information purposes only and does not constitute investment or other professional advice or an opinion of any kind.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation. Please note the blog post is time sensitive and subject to changes in legislation or law.

Planning for the Creeping Tax Liability in your Corporation

In January, I wrote a post titled RRSPs and Corporations – Your Silent Creeping Tax Liability. The blog noted that whether you are currently working, near retirement or in retirement, you and/or your corporation have silent creeping tax liabilities accumulating in your Registered Retirement Savings Plan ("RRSP") and/or corporation.

I followed up in April, with a post on some potential planning to address the creeping RRSP liability. Today, I discuss some planning and considerations to reduce the creeping corporate tax liability you may be accruing.

Corporate Tax Attributes

Many corporations have built up corporate tax attributes that can be accessed prior to retirement or in retirement that can reduce the tax liability related to you and/or your corporation. I discuss these below.

Shareholder Loans

Repayment of shareholder loans owing to you and other shareholders is the most tax efficient way to remove funds from your corporation on a tax-free basis.

Capital Dividend Account

If your corporation has a capital dividend account ("CDA") balance, paying out capital dividends is a great way to remove funds on a tax-free basis and reduce your ultimate corporate tax liability (Non-resident shareholders are subject to withholding tax on capital dividends). See this blog post I wrote for all the details of a capital dividend account. 

For some unknown reason, many corporations do not pay out tax-free capital dividends from their CDA on timely basis. Since this account is a "moment in time" account, this can prove very costly if you incur capital losses. For example, if your corporation had previous capital gains and the CDA balance is say $100,000 today, but the corporation incurs capital losses of say $60,000 tomorrow, the CDA account will be reduced by $30,000 to $70,000. Thus, your corporation will have forgone $30,000 in tax-free dividends if the capital dividend had been paid before the capital losses were incurred. 

Due to the poor stock markets this year, you may be triggering capital losses as part of the corporation's investment and/or tax planning. Discuss paying out a capital dividend with your investment advisor and accountant before triggering any capital losses this year. 

Refundable Dividend Taxes On Hand

Your corporation may have balances in the following two notional accounts: Eligible Refundable Dividend Tax on Hand (ERDTOH) and Non-Eligible Refundable Dividend Tax on Hand (NERDTOH). These accounts are the successor accounts of what was formerly known as Refundable Dividend Tax On Hand (RDTOH). These accounts are essentially prior years corporate taxes paid that are refundable when the corporations pays dividends to the shareholders. The accounts act as a mechanism to ensure that you and your corporation are not double taxed. 

While your corporation needs to pay a taxable dividend to trigger refunds from these accounts (the rules are confusing, speak to your accountant), the government essentially pays your corporation a refund somewhat equivalent to the personal tax you owe on the dividend, so you net out much better than if you paid a taxable dividend with no refundable tax.

Return of Capital

If your corporation has “hard” paid-up-capital (“PUC”) for money you previously paid to purchase corporate shares from treasury, you should be able to return most of the PUC tax-free.

Income Splitting

Payment of Wages

If you have family members who work in the business and are not paid a salary or are paid a very low salary, consider paying them a “reasonable salary”. I say reasonable, as the CRA requires a salary to family members to be reasonable to be deductible.

Tax on Split Income Rules

The Tax on Split Income Rules (“TOSI”) rules are very complicated and far beyond today’s brief discussion. However, in general, TOSI will not apply on amounts paid to a business owner’s spouse or common-law partner, who are inactive in the business, so long as the business owner has reached age 65 during the year. This will be the case where the amount would have been excluded from TOSI had it been received by the business owner directly, by virtue of the fact that they would have otherwise met another exclusion. So, an inactive spouse whose shares were subject to TOSI before the business owner turned 65, will in most cases, now be able to receive dividends on their shares without the TOSI rules applying. It may also be possible to reorganize the company when the business owner turns 65 to provide shares to the inactive spouse.

Tax Reorganizations/Tax Planning

If you have a successful corporation (especially an active corporation), your accountant or tax lawyer may have one or two reorganization/tax plan ideas to consider that could possibly lower your creeping tax liability. The Federal budget in April this year contains proposals to limit a couple of these planning ideas, so you should speak to your accountant to review whether there are any planning opportunities still available that may work for you and your corporation(s).

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation. Please note the blog post is time sensitive and subject to changes in legislation or law.