A major part of my investment strategy is dividend investing. I need to warn you though, the approach is boring.
Our goal is to earn tax-efficient (taxable accounts) and tax-free (thanks TFSA) dividend income to the tune of about $30,000 per year from Canadian companies for retirement.
This cash flow in addition to the following assets should provide financial independence for us:
- My defined benefit pension at work +
- Our paid off home +
- Investments that include low-cost, diversified ETFs inside our RRSPs.
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 the dividends paid for many of our holdings.
- I try to avoid selling any company regardless how far the stock price falls. If anything, I buy more when prices tank.
What do I own?
- Most of the holdings in the ETF XIU. These are Canadian banks, insurance companies, pipeline companies, telecommunication companies, energy companies and utilities.
Some more information about my dividend investing approach:
I keep Canadian dividend paying stocks unregistered or inside the 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 likely one Canadian ETF 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. 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 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.
Summary of Asset Allocation Preferences:
- Canadian dividend paying stocks
- Canadian dividend paying stocks and REITs
- I probably will, eventually, hold some U.S. dividend paying stocks in my USD-dollar TFSA once my RRSP is collapsed for tax-free U.S. income.
- Canadian REITs
- U.S. dividend paying stocks
- U.S.-listed ETFs
Want some help selecting which dividend paying stocks to own? Own the same stocks the big ETFs and mutual funds own. Seriously. Look at the holdings in the ETF XIU.