Dividends

A major part of my investment strategy is dividend investing.  I plan on using dividend income to pay for a big portion of our retirement expenses.

Our goal is to earn tax-efficient and tax-free dividend income (thanks TFSA) to the tune of $30,000 per year from Canadian companies.

This money in addition to the following should provide financial independence:

Our goal is to have an investment portfolio worth $1 million+ (excluding pensions and home value) to retire on by 2028.

My Dividend Investing Approach:

  • I only buy companies that pay dividends.
  • I have a bias to owning companies that have a long history of increasing their dividends over decades.
  • I reinvest dividends (DRIPs) for many of my holdings.
  • I try to avoid selling any company regardless how far the stock price falls.

Some more information about my dividend investing approach:

I keep Canadian dividend paying stocks unregistered or in my TFSA.  Why?

Canadian dividend-paying stocks receive favourable tax treatment from our government; they are eligible for the Canadian dividend tax credit if left unregistered (outside TFSA and RRSP accounts).  

My plan is to own Canadian dividend paying stocks in my non-registered account for tax-efficient dividends.

Over time, I will use the contribution room available to me in the TFSA to hold primarily Canadian dividend paying stocks, Canadian Real Estate Investment Trusts (REITs) and Canadian ETFs to generate tax-free retirement income.

I keep U.S. dividend paying stocks in my RRSP.  Why?

U.S-dividend paying stocks do not receive any favourable tax treatment from our Canadian government. So by keeping U.S. stocks inside an RRSP I avoid paying any withholding taxes.

• U.S. stocks held within RRSP or LIRA or RRIF = no withholding taxes.
• U.S. stocks held within RESP or TFSA = pay 15% withholding taxes.
• U.S. stocks held unregistered accounts = pay 15% withholding taxes (which is recoverable).

I avoid holding my U.S. stocks in a non-registered account.  Why?

You already know above when U.S. dividend stocks are held inside an RRSP or LIRA or RRIF there is no withholding tax on U.S. dividends.   This is not the case when you hold U.S. dividend stocks in a non-registered account.  In a non-registered account you’ll pay:

  • 15% U.S. withholding tax off the top AND
  • because U.S. dividends don’t qualify for the Canadian dividend tax credit, you’ll pay tax at your marginal rate on the full amount of the dividend.  U.S. dividends held in a non-registered account are taxed like interest income.

I keep Canadian REITs in my TFSA and RRSP.  Why?

Real Estate Investment Trusts (REITs) are companies that invest in real estate assets and distribute their income (primarily from rent) to shareholders, usually in the form of dividends, return of capital, and income. While it depends on the REIT, if the REIT distributes a portion of their income as return of capital, interest, capital gains or dividends, each portion will be taxed accordingly.  Keeping REITs inside a TFSA or RRSP avoids this tax complication.

My Asset Allocation Preferences:

Non-Registered:

  • Dividends from Canadian dividend paying stocks

TFSA:

  • Dividends from Canadian dividend paying stocks
  • Distributions from Canadian REITs
  • If I really have to, U.S. dividend paying stocks will be in USD-dollar TFSA once my RRSP is collapsed.

RRSP:

  • Distributions from Canadian REITs
  • Dividends from U.S. dividend paying stocks
  • Distributions from U.S. ETFs

Want some help selecting which dividend paying stocks to own?  Own the same stocks the big ETFs and mutual funds own.  Seriously.

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