You recently wrote that Algonquin Power & Utilities Corp. (AQN–TSX) has switched to declaring dividends in U.S. dollars from Canadian dollars. Can I still get my dividends in Canadian dollars or am I out of luck?
Unless you give your financial institution instructions otherwise, there's a good chance you will continue to receive the dividend in Canadian dollars anyway. As a shareholder, that's what I've found. My discount broker gets the dividend in U.S. dollars from Algonquin and then converts it to Canadian dollars on the payment date before depositing it into my account.
There's a downside to this, however: When converting currencies, brokers typically use an exchange rate that is favourable to them – and not so favourable to you. This can add about 1.5 per cent or more in foreign exchange costs.
You can avoid these costs – or at least delay them – by instructing your broker to deposit the dividend into your account in U.S. dollars instead. If you decide to convert the money to Canadian dollars at a later date, you'll still have to pay the broker's hefty conversion costs, but it will at least give you some control over the process. (Note: Not all brokers let you hold U.S. cash in a registered account.)
There is another way to receive Algonquin's dividend in Canadian currency, however. When Algonquin announced the switch to U.S. dividends in August, the company stated that "beneficial shareholders" – those whose shares are held by a financial institution – can contact their broker and request the Canadian-dollar equivalent of the dividend.
It sounds like the same thing, but it's not. In the first case discussed above, the broker receives the dividend from the company in U.S. dollars on the payment date and then does the conversion to Canadian dollars – at a profit – before handing the cash to you.
In the second case, the broker receives the dividend after the currency has already been converted to Canadian dollars by Algonquin's transfer agent. The broker then passes the Canadian cash directly on to you, without making a profit. Another key difference with the second option is that the conversion is based on the Bank of Canada noon exchange rate on the dividend record date – not on the dividend payment date, which is usually a couple of weeks later.
Exchange rates fluctuate, so if the Canadian dollar falls sharply between the record date and payment date you might actually get a better exchange rate from your broker anyway. But currency moves are notoriously difficult to predict. Assuming the currency remains stable, you will receive more cash if you elect to have the dividend converted to Canadian dollars based on the Bank of Canada's exchange rate, which – on any given day – will be better than the rate at your financial institution.
Unfortunately, not all bank-owned brokers are making the Canadian currency option available, said Kelly Castledine, Algonquin's director of investor relations.
"We set it all up with CDS [Canadian Depository for Securities], so it's doable. All the operations are in place to do it. It's just that the banks don't want to because they don't get the FX [profit]," she said.
Royal Bank's discount brokerage is among those not participating, she said. When I called my own broker, BMO InvestorLine, I was told the same thing.
However, if your shares are registered in a dividend reinvestment plan (DRIP) with Algonquin's transfer agent, CST Trust Co., your dividends will be automatically converted to Canadian dollars on the record date at the Bank of Canada's noon exchange rate, Ms. Castledine said. (Note: For Canadian resident shareholders, Algonquin's dividends are eligible for the dividend tax credit regardless of the currency in which they are received.)
Algonquin isn't the only company to offer its dividend in both U.S. and Canadian dollars. Brookfield Renewable Energy Partners LP (BEP.UN–TSX), for example, also declares distributions in U.S. dollars but gives shareholders the option to receive them in Canadian currency based on the Bank of Canada noon exchange rate on the record date.
But Brookfield Renewable is also having trouble getting all the banks to play along.
"We implemented the program earlier this year as an investor-friendly initiative. Some of our shareholders had specifically asked for it," said Zev Korman, Brookfield Renewable's vice-president of investor relations. "That said, we understand some dealers may not offer the option and that's something that is outside our control."
John Heinzl