This blog is about saving and investing my way to a $1 million portfolio.
A major part of our investment strategy to accomplish this is dividend investing. Here is our chart. The table in green is our expected future dividend income. You can see our goal for the end of 2023. As our mortgage decreases our savings for investment purposes are expected to increase starting in 2020.
We believe earning $30,000 per year in dividend income will cover most of our basic living expenses (property taxes, home maintenance costs, utilities, food, etc.) for the rest of our life.
We believe this dividend income plus the following assets should provide a comfortable retirement:
- Workplace pensions (my defined benefit pension plan, my wife’s defined contribution pension plan) +
- Our paid off home +
- U.S. and international investments via ETFs inside our RRSPs.
This is my approach. I need to warn you though it’s rather boring.
- 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 or generations.
- I reinvest the dividends paid for many of our holdings.
- I own Canadian companies in taxable and tax-free (TFSA) accounts.
- I try to avoid selling any company regardless how far the stock price falls. If anything I buy more stock when prices tank.
What do I own?
- These are banks.
- These are insurance companies.
- These are pipeline companies.
- These are telecommunications companies.
- These are energy companies.
- These are utilities.
I also own a number of Canadian Real Estate Investment Trusts (REITs).
It’s rather simple really. Buy and hold these companies. Reinvest dividends. Relax. Wait. Watch the income roll in. Do nothing but reinvest dividends. Wait some more. Watch more income roll in. Rinse and repeat.
Here is some more information about the approach and why we invest the way we do…
I hold Canadian dividend paying stocks in my non-registered (taxable) account and inside our Tax Free Savings Accounts (TFSAs). 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). The plan is to own 30-40 Canadian dividend paying stocks for tax-friendly and tax-free (TFSA) dividend income.
I keep a few U.S. dividend paying stocks in my RRSP. Why?
I hold U.S. blue-chip stocks for US $$ income and long-term growth. Unfortunately U.S-dividend paying stocks do not receive any favourable tax treatment from our Canadian government. I keep U.S. stocks inside an RRSP to avoid paying any withholding taxes. See below for What to invest where?
I own a few of the top holdings in the ETF VTI (think Wells Fargo, Johnson & Johnson and Coca-Cola). I own these stocks because they have a lengthy dividend histories and they tend to increase their dividends over time. With each dividend increase I get inflation-fighting power. Other than about 10 U.S. stocks I’m an index investor. Indexing is smart. Get on it if you don’t already invest this way!!
Our longer-term goal is to index more of our RRSPs – leading up to early retirement.
What to invest where?
I do not/will not hold U.S. stocks in a Canadian non-registered account. Why?
Here is a summary of what I’ve learned:
- 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 at time of tax filing).
This is why I keep U.S. stocks inside my RRSP: no withholding taxes 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. Thankfully, for U.S. stocks in non-registered accounts, you get a credit for the amount withheld. This credit can be applied against Canadian income taxes so in most cases that leaves you square—providing your Canadian tax rate is at least 15%.
I keep Canadian REITs in my TFSA or RRSP exclusively. 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 Summary – Asset Location Preferences:
Non-Registered = Canadian dividend paying stocks; take advantage of the dividend tax credit.
TFSAs = Canadian dividend paying stocks and Canadian REITs; no dividend tax credit but at least tax-free income.
RRSPs = U.S. dividend paying stocks and U.S.-listed ETFs; no withholding taxes, USD dividends and long-term capital appreciation via equity ETFs.
Want some help selecting which Canadian dividend paying stocks to own? Consider owning and researching the same top holdings the big ETFs and mutual funds own in their top-10 or 20 holdings.
Again, look at the holdings in the ETF XIU, for an example. These companies have been paying dividends for generations. You avoid paying any ongoing money management fees to do so. You can then simply index invest everything else for U.S. and international exposure.
Investing can be that simple.