My Portfolio Asset Allocation – Part 7 (BMO)

This is a multi-part series exploring in-depth each of the individual allocations I have in my B&D investment portfolio.

In today’s post, I’ll dig into BMO which is the stock ticker symbol for Bank of Montreal. I’ll talk about:

  • what it is
  • the actual allocation in the portfolio
  • why I hold this in my B&D portfolio
  • fees/costs to hold it
  • the income it pays me
  • its growth potential
  • which investment vehicles (TFSA, RRSP, LIRA, non-registered account) I put this stock in
  • Alternative stock(s) for tax loss harvesting purposes
  • the future of it in my B&D portfolio

Information provided is considered accurate and up to date at the time this post was published.

What is it?

As with the last blog post in this series which focussed on ENB (Enbridge), this one also is for a stock. In this case, it is for BMO.

From the BMO website, I pulled the following:

As the 8th largest bank in North America by assets, we provide personal and commercial banking, wealth management and investment services to more than 12 million customers.

I also looked at  Wikipedia and found another interesting tidbit:

The company has not missed a dividend payment since 1829, paying dividends consistently through major world crises such as World War I, the Great Depression, World War II, and the 2008 financial crisis; this makes the Bank of Montreal’s dividend payment history one of the longest in the world.

That’s a pretty impressive track record.

THE PORTFOLIO ALLOCATION

Why Hold it in my b&D portfolio?

The reason I hold this stock as part of my B&D portfolio is because I used to work for them and this stock is what was left from my ESOP (Employee Share Ownership Program) when I started my severance period from the company. 

Have no worries. This was not one of those depressing moments where you got called into a room, advised you were terminated, and then wondered what you were going to do to pay your bills and keep yourself afloat financially. In my case, it was anticipated, requested, and long overdue.

Oh yeah! I had been advising my employer for a couple years already that I was ready to go and would like a severance package. I had specifically targeted a role in head office at that time as this is usually the first place job cuts occur. Want to leave your company and be paid to do so? Make a move to head office. Your wish can become reality. I parted ways with my former employer on very amicable terms.

Anyways, back to the ESOP. At the time that I was working there, the company offered to match 50% of what you contributed up to 6% of your base salary up to a $100,000 salary. Therefore, if you made a base salary of $100,000, you could contribute up to $6,000 annually and the company would contribute up to an additional $3,000. You could of course contribute more but you wouldn’t get a match to anything over 6% of your base salary. I considered it a sweet deal and took full advantage of it. Those terms have changed since I left and are not as generous as they used to be.

As standard practice for this particular ESOP plan, I was also allowed to withdraw funds without penalty from the ESOP two years after the last withdrawal without penalty. During covid, the employer recognizing the financial hardship many employees were experiencing, that restriction was lifted. Being a fan of diversification, I would withdraw funds every two years and redeploy the cash into the rest of my B&D portfolio. This is really good to do. Remember Lesson #4As much as BMO has been around for a very long time, it’s not good to hold all your eggs in too few baskets. 

An extra bonus is the employer portion of the ESOP (that 3% match) could be moved to my RRSP without any penalties even if I didn’t have RRSP contribution room available. Yum! Yum! 

So ultimately, the BMO stock I hold is what was accumulated in the ESOP from my last withdrawal from the ESOP and my severance period beginning. Good times!

the associated fees/costs

Unlike ETFs that have an MER (management expense ratio), stocks don’t have this. The only potential cost to holding something like BMO is a commission fee for buying or selling it (there were no commission fees to purchase BMO stock in my ESOP and a very minor one to sell). There are many online discount brokerages like Wealthsimple in Canada that don’t charge a commission fee at all. (I have no affiliation to Wealthsimple). Therefore, it is possible to buy or sell a stock with zero costs.

income Received from this Stock

Very simply, BMO pays out Canadian dividend income. That means for every dollar earned (assuming it’s in your non-registered account), you get a Canadian Dividend Tax Credit and reduce the amount of income tax owing. 

Please note that taxation does change if the dividends from BMO are tax sheltered or tax deferred. The investment vehicle (e.g.: TFSA, RRSP, LIRA, non-registered/cash/margin account) that houses the ETF will determine which tax situation applies.

Growth potential for this Stock

From my personal experience, BMO has been a medium growth stock. It does have it’s moments where it shoots up quickly over a short term period however, over the long run, it’s growth rate does not match growth stocks out there. After all, it’s a mature business considered to be a blue chip dividend payer.

Placement in Investment vehicles

I’m a Canadian with tax residency in Canada so investment vehicles and tax treatments are related to Canada. I currently have a TFSA, RRSP, LIRA, and a non-registered account which is also known by many as a cash account or a margin account

Legally minimizing and/or deferring the greatest amount of taxes possible is the primary criteria I use to decide which investment vehicle to house an ETF, or a stock in this case. Since I have a TFSA, RRSP, LIRA and a non-registered account, I use a 3 level filter which is below.

PRIMARY: TFSAs are for investments with the highest capital growth potential as it offers tax-free compounding and any withdrawals made are tax free as well. 

SECONDARY: The non-registered account takes up any of the surplus that doesn’t fit in the TFSA. Also, any investment income that has preferential tax treatment such as capital gains (as I write this, only 50% of capital gains are taxable) or is eligible for the Canadian Dividend Tax Credit should be going in this account.

TERTIARY: RRSPs/LIRAs take up any of the surplus that doesn’t fit in the TFSA and the non-registered account. Therefore, the lowest growth investments would be found here  as well as investments with the heaviest taxable income generated (in most cases, that would be bonds). The benefit of an RRSP/LIRA is that any income taxes owing are deferred until I decide to withdraw from them. The full amount withdrawn is taxable in the same way as employment income. Any taxes paid at withdrawal are based on whatever tax bracket I fall into for that particular calendar year. Therefore, compounding can occur tax free until then.

Based on the above criteria, in which investment vehicle(s) do I currently have BMO? 

I actually hold this stock in my non-registered account as well as my RRSP. There are three reasons I hold it in my non-registered account and an additional reason I hold it in my RRSP.

First, I have the room in my non-registered account. 

Second, it’s a medium growth stock and therefore I would not hold it in my TFSA as I have higher growth ETFs housed there.

Third, the favourable tax treatment when it comes to the dividend. Same goes for any capital gain that could occur (e.g.: if I need to sell a portion of it for rebalancing purposes or simply sell it completely).

Lastly, the reason I hold part of it in my RRSP is due to the fact it came from my ESOP (the employer matching component). If it had not been for that, I’d be holding it all in my non-registered account.

tax loss harvesting strategy

Tax-loss selling (or tax-loss harvesting) occurs when you deliberately sell a security at a loss in order to offset capital gains in Canada. You can then use these losses to offset your taxable capital gains. This applies to the non-registered account only. The other investment vehicles (TFSA, RRSP, LIRA) are not eligible for this.

In Canada, the last day in a calendar year for tax-loss selling is typically the third to last business day of the year (not counting any statutory holidays that could happen between then and the end of the year). If you sold at a loss on or before that date, you’re able to deduct your loss against your gains in that calendar year. However, you can also carry your loss back for the previous three years to offset capital gains or carry it forward indefinitely to offset future capital gains.

Also, beware causing a wash sale. This can also be called the superficial loss rule. What this means is that if an investor buys back a security within 30 days of selling it, then they are not permitted to claim the capital loss for tax purposes. Failing to obey the 30-day rule will result in the capital loss being disallowed for tax loss harvesting. To avoid this, I would buy an ETF similar to the one sold but measured on a slightly different index. A wash sale can also occur if you sell in one investment vehicle (e.g.: your non-registered account) and buy that same stock in another (e.g.: your TFSA) so be careful to not do that within the 30 day period.

In this case, BMO is a stock. It does not track an index as with the ETFs I have spoken about in the previous segments of this portfolio allocation series. If I decide to sell BMO though, I would simply shift the funds into ETFs, not back into a stock. If someone really wanted to hold bank stocks in their portfolio long term and do tax-loss harvesting, there is the option to buy stock from another Canadian Bank. My goal is not hold it long term though.

 

The future of this Stock

At this time, BMO does provide a satisfactory dividend. There will come a point where it will be sold and converted to an ETF. As it makes up only about 1% of my B&D portfolio, it’s not a high priority and I’ll deal with it at some point in the future. 

Summary

So that’s my overview of the stock BMO that currently holds an allocation in my B&D portfolio. Please let me know what you think. Was the overview useful? Was anything missing? I’m happy to hear all feedback.

One thought on “My Portfolio Asset Allocation – Part 7 (BMO)”

  1. did you know (you probably did, since you worked for them) that BMO has paid dividends for 190 consecutive years? not even missing dividends during the great depression.

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