A major part of my investment strategy is dividend investing. I need to warn you though the approach is boring.
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. When we reach this goal, hopefully by the end of 2023, we’ll likely retire.
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.
The 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 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.
What do I own?
- Most of the holdings in the ETF XIU. These are Canadian banks (think Royal Bank, TD Bank, etc.), insurance companies (think Sun Life), pipeline companies (think Enbridge), telecommunication companies (think Rogers and BCE), energy companies (think Suncor) and utilities (think Fortis and Emera).
Some more information about my dividend investing approach:
I only keep Canadian dividend paying stocks non-registered 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). The plan is to own 30-40 Canadian dividend paying stocks for tax-friendly and tax-free 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). This will provide retirement (hopefully early retirement) 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. 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).
What do I own?
I own a few of the top holdings in the ETF VTI (think General Electric, Wells Fargo).
Other than a few 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 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 only keep Canadian REITs in my TFSA or 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 (no REITs, no U.S. stocks).
- Canadian dividend paying stocks and REITs. I will probably, eventually, hold some U.S. dividend paying stocks in my USD-dollar TFSA once my RRSP is collapsed for tax-free U.S. income. This will be a tax advantage if my tax rate in retirement is more than the tax rate on U.S. dividends inside the TFSA (15%).
- Canadian REITs but primarily U.S. dividend paying stocks and U.S.-listed ETFs.
Want some help selecting which Canadian dividend paying stocks to own? Own the same stocks the big ETFs and mutual funds own in their top-10 or 20 holdings. Seriously. Look at the holdings in the ETF XIU and continue your research from there.