This blog is about saving and investing my way to a $1 million portfolio.
A major part of my investment strategy to accomplish this is dividend investing. I need to warn you though the approach is boring.
Our dividend income goal: earn $30,000 per year from Canadian companies in taxable and tax-free accounts.
Here is our chart. The value at the end of 2015 is highlighted in yellow. The table in green is our expected future dividend income. You can see our goal for 2023.
Reaching this goal should allow us to achieve financial freedom – this is because most our basic living expenses (property taxes, home maintenance costs, utilities, food, etc.) will be covered by dividend income (and we won’t need to touch our capital to do so).
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 +
- Indexed investments that include low-cost, diversified ETFs inside our RRSPs.
This is my boring 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 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 company stock when prices tank.
That’s really it. Buy and hold and hold some more.
What do I own?
- Most of the holdings in the ETF XIU. These are Canadian banks (7) (think Royal Bank, TD Bank, Bank of Nova Scotia, and more), insurance companies (3) (think Sun Life, Manulife, and more), pipeline companies (3) (think Enbridge, TransCanada, and more), telecommunication companies (4) (think Rogers, BCE, Telus, and more), energy companies (3) (think Suncor) and utilities (3) (think Fortis, Emera, and more).
- I also own a handful number of Canadian Real Estate Investment Trusts (REITs). Many holdings in the ETF VRE.
Here is some more information about my dividend investing approach and how I invest:
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 dividend income.
Over time I will use the TFSA contribution room available to us every year to hold primarily Canadian dividend paying stocks and Canadian Real Estate Investment Trusts (REITs) for tax-free income.
I keep a few 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. I keep U.S. stocks inside an RRSP to avoid paying any withholding taxes. See below for “what to invest where”:
• 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).
I own a few of the top holdings in the ETF VTI (think General Electric, Wells Fargo, Johnson & Johnson and Coca-Cola). I own these stocks because they have a lengthy dividend history and they tend to increase their dividends over time. Other than about 10 U.S. stocks I’m an index investor. My goal is to have our RRSPs assign about 50% allocation to indexed funds is the coming years leading up to early retirement for extra diversification.
I do not/will not hold U.S. stocks in a Canadian 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. 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.
In Summary – Asset Location Preferences:
Non-Registered = Canadian dividend paying stocks.
TFSAs = Canadian dividend paying stocks and Canadian REITs. .
RRSPs = U.S. dividend paying stocks and U.S.-listed ETFs.
Want some help selecting which Canadian dividend paying stocks to own? Consider owning the same stocks the big ETFs and mutual funds own in their top-10 or 20 holdings. You avoid paying any ongoing money management fees. Then you can simply index invest everything else for U.S. and international exposure.
Investing can be that simple.