This blog is about saving and investing my way to a $1 million portfolio. Hopefully we’ll get there by age 50.
A major part of our investment strategy to accomplish this $1 million goal is dividend investing. Here is our chart. The income in green is our expected future dividend income – our goal for the end of 2023. As our mortgage decreases our savings for investment purposes are expected to increase starting around 2020 through 2023.
We believe we’ll be halfway to our dividend income goal by the end of 2017.
We believe our goal – earning $30,000 per year in tax-free (thanks TFSA) and tax-efficient (taxable account) dividend income – will cover most of our basic living expenses for as long as we live.
Here are some examples of what this money will cover for the rest of our lives:
- property taxes ($4,200 per year)
- home utilities (heat/gas, hydro, telcos, water/well maintenance) (up to $7,800 per year)
- general home maintenance and improvements (around $5,000 per year)
- home insurance (around $1,500 per year)
- food, groceries and household supplies (about $10,000 per year; could be less).
- healthcare costs (various).
This dividend income plus the following assets should provide a comfortable “retirement”:
- Workplace pensions (>$20,000 per year at age 55, more at age 60 if we defer our pensions) +
- Maxed out RRSP assets +
- Our paid off home +
- Any part-time work from hobbies (if we chose to do that!)
You’ll note I did not include government benefits like Canada Pension Plan (CPP) or Old Age Security (OAS). That income will simply be icing on the cake.
This is my dividend investing approach. I need to warn you – it’s 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 most of the dividends paid from 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.
- I use low-cost Exchange Traded Funds (ETFs) to invest in other countries from around the world.
What Canadian stocks do I own?
Most of the top holdings in the ETFs XIU and XEI and VDY – the same stocks the big and popular ETFs 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).
My investing process is rather simple really.
- Buy and hold companies.
- Reinvest dividends.
- Relax. Do nothing. Wait.
- Watch the income roll in from dividends paid.
- Reinvest dividends (again).
- Wait some more. Watch more income roll in.
- Rinse and repeat until wealthy.
Remember: Money that makes money can make more money. If you let it.
Here is some more information about our approach and why we invest the way we do…
Why do I invest this way?
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. These stocks 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 (taxable account) and tax-free (TFSA) dividend income.
I keep a few U.S. dividend paying stocks in my RRSP. Why?
I hold a few U.S. blue-chip stocks for U.S. dollar 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 (15%). See below for What to invest where?
I own a few of the top holdings in the ETF VTI (think Johnson & Johnson, Procter & Gamble, and Coca-Cola). I own these stocks because they have a lengthy dividend histories and they tend to increase their dividends over time. Some of these U.S. companies have been raising dividends for generations.
With each dividend increase I get inflation-fighting power. Other than about 10 U.S. stocks I invest in low-cost ETFs. We will continue to use ETFs inside 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 when you file your tax return. 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 Asset Location Preferences
Non-registered account: Canadian dividend paying stocks; take advantage of the dividend tax credit. In Ontario, you can earn about $50,000 in dividend income tax-free provided you have no other income to report. Incredible really.
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 starting your investing research?
Consider researching the top holdings the big ETFs and mutual funds own in their top-10 or 20 holdings.
These companies have been paying dividends for generations. By owning the companies directly 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.