Well, it’s been a busy month folks. No major transactions to report but there was lots of work accomplished around the house! Ah well. If I’m not making big financial gains at least some progress is being made elsewhere in my life!
Actually, that’s not entirely true…
Earlier this year, I maxed out my TFSA contribution for 2011. Since mid-April, I now hold three different dividend-paying stocks in my TFSA:
- Sun Life Financial (SLF)
- Husky Energy (HSE)
- H&R Real Estate (HR.UN).
The plan going-forward for my TFSA remains unchanged: transfer Canadian dividend-payers (from unregistered accounts) into my TFSA as contribution room allows me to. This will shelter all dividends paid and keep all dividends re-invested, tax-free.
April 2010 was a great month for the TFSA – I received one (free) share of HSE and SLF thanks to reinvested dividends. Beyond my TFSA, overall, my income update for April 2011 continues to demonstrate the power dividend-investing can provide: a get-wealthy-slowly-but-eventually strategy that will provide some financial security in good markets and in bad. Across our entire portfolio, including my wife’s accounts, we now own a total of 21 different investment products. The majority of these investments (18) are dividend-paying stocks and the rest are three broad-market ETFs held exclusively in our RRSPs: XIU, XBB and VWO:US using a bond-matches-your-age asset allocation.
Based on holdings and values at the end of April 2011, we’re projecting to earn just shy of $4,500 in total income for the entire 2011 calendar year if dividends were paid out in cash. If you’ve been keeping track on my blog, that’s an increase of about $100 from March 2011 and almost $200 more since December 2010. Other than a couple small optional cash purchases of Bank of Nova Scotia and Fortis stock, this increase in income arrived from doing absolutely nothing except resolving ourselves to the power of reinvested dividends – letting our money earn more money.
As much as possible, we continue to reinvest all dividends from stocks and distributions from ETFs to buy more shares of the same either via full DRIPs with stock transfer agents or via synthetic DRIPs with our discount brokerage institution. April 2011 marks my second year as a DRIPper of multiple Canadian dividend-paying stocks, and the process feels great!
Feeling this good reminded me of what Lowell Miller expressed so nicely in his classic: The Single Best Investment:
“Dividends and dividend growth are the real-life signal that a company has the wherewithal to pay you…it is the logical and inevitable result of investing in a company that is actually doing well enough, in the real world, to pay both dividends and to increase them on a regular basis. Dividends are paid from earnings. When a company has reached a certain level of maturity and stability, it begins paying dividends. What you see is what you get. Through the dividend, a company can show you how well it’s doing.”
The simple fact is: success breeds success. I firmly believe my journey owning dividend-paying stocks as part of my overall investment plan will be no exception.
What are you doing to harness the power of compounding in your portfolio? Got any comments for my journey?
Share your thoughts!
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Thanks for the useful reply! I definitely plan on checking back frequently, and have you bookmarked as a regular blog read.
I completely understand the concept of the gains on the TFSA being themselves tax-free; that’s what makes it tax free (as opposed to not having already paid tax on the principal that is invested within the TFSA); so I get that I can withdraw dividend payments tax-free. I’m just a little less clear on the mechanics of *not* withdrawing when it comes to dividends. To contrast, I understand that shares within a TFSA wouldn’t be subject to income tax when sold, so that any capital gains on the shares would accrue throughout whatever period the stock was held and then wouldn’t be taxed upon sale of the share….
Oh, — hold on — I think I am having an “a-ha” moment — if you sell a share you’ve made a gain on, but rather than take the profit and run, you buy another, different share, you are still operating within your TFSA and the next buy doesn’t count against the $5k that can be invested! Did I get that right? And it’s the same with the dividends, then — if I get dividends from CDZ that don’t amount to enough to buy a full share of CDZ but I use them (without withdrawing them from the TFSA) to buy a different, cheaper stock, then that doesn’t count against the $5k principal? Obviously, I want to put my dividend income to work for me by re-investing it and watching the joy of compounding through time… and I’m finally understanding (I think) from your response how I can do that!
Thanks again!
@Dee
Hey Dee, isn’t the heat and humidity in Ottawa wild lately? Whoa. Glad to know you’re enjoy my blog and it reasonates with you. Check it often! I will do my best to respond to your question.
Yes, you can contribute $5 K/year in the TFSA and the income generated from investments in the TFSA is not taxable, tax-free all the way. That includes dividend income even if you choose to have that income re-invested to buy more shares. That is exactly what I am doing within my TFSA; re-investing dividends paid by SLF and HSE to buy one-free share of each business each quarter when dividends from those companies are paid out. Re-invested dividends do not count against the contribution limit. Re-invested dividends from CDZ would be the same. For example: $5,000 in the TFSA of CDZ (great investment by the way) would give you about 227 CDZ units. CDZ pays $0.055 per month. About 3% yield. That means you’re getting paid about $12.49 each month; but until you get more CDZ units, that $12.49 won’t buy you one-free CDZ share since each CDZ share cost about $22. Instead, you’d get your $12.49 deposited in cash in each into the TFSA and you could withdraw that $12.49 if you wanted to, tax-free. Does that help clarify?
@Confused
Well, I must provide a big disclaimer to start. I’m no tax expert or an estate planner. I would suggest you speak to a professional about your needs.
Disclaimer aside, my personal view is this: I see an annuity like a GIC for life; income for life. Here are some pros and cons of annuities if you didn’t already know them, as I understand them.
The pros:
• All payments are guaranteed by insurer; no money management issues for you – the investment risk lies with the insurance company.
• Savings are not taxed at time of purchase but payments are taxed as you receive them.
The cons:
• Most payments end upon death, unless the annuity is for a guaranteed period; there could be a death benefit paid out for designated beneficiary or estate.
• There is no flexibility to vary income from year to year; the contract is FINAL – can’t change to be more flexible at a later date.
Also, based on what I understand about annuities, they can be a tax advantaged tool. The income from an annuity is a combination of interest and principal. So, if you think you’re NOT going to be in a lower income tax bracket when you start taking the money out of your annuity, an annuity may not be for you. An annuity reduces the amount of taxes payable because it amortizes the investment income over the lifetime of the annuity. This is good at age 80, not at age 43.
Alas, since you said “I would like to build for my future”, using your $244.00/month could be leveraged to pad your TFSA over time. You might already know you can withdraw money from the TFSA tax-free; at any time, for any reason with no tax consequences from the government. The money you withdraw from your TFSA will not affect “income-tested benefits” when you get older, like getting Old Age Security (OAS), Guaranteed Income Supplement (GIS) or Employment Insurance (EI). That is amazing!!! Maybe a consideration?
Again, I suggest you consult a few professionals about your needs and gather some more information about annuities and their structure. I hope I helped?
Hi,
Thanks for sharing your financial plan through this blog. I am also in Ottawa. The idea that I can do it to somehow resonates more when I hear about people close to me, geographically.
I’m a little confused about one aspect of TFSAs and I’m wondering if you might be able to shed light for me. I understand that we can each contribute 5k/yr and that the income generated from the TFSA is not taxable, but I’m a little confused about re-investing the dividends within the TFSA and how to make sure that doesn’t count against the contribution limit. I’ve just gotten started on my TFSA, making a contribution to a dividend-paying fund (Claymore S&P/TSX Canadian Dividend ETF – CDZ) using Questrade. If I understand correctly, I need to complete and mail-in a form to Questrade to automatically re-invest the dividends into the fund. If I do so, do you know whether these additional purchases of shares count against the 5k limit or not?
It does sound like a good plan Mark. It’s great that you have a pension from work as well. Nicely done there! You’re going to be rocking, my friend.
I can only hope Andrew! 😉
I didn’t start this journey alone, I got lots of help learning the ropes from you and many others. Thanks for your continued support!
Hi there,
Looking for some help please…
I have just inherited an annuity worth 60,000. Monthly payments of 244.00 a month, for life. I am 43 years old. I would like to make money off of this money as I do not need it right now as I work full time etc. I would like to build for my future. What could I do with with this monthly payment to help with my retirement down the road? I am very naive to this annuity strategy and would really love to hear your options that I have.
Thank you in advance!
@101 Centavos – thanks again for the support! Sounds like you have a great plan yourself 😉
Hey Mark,
I have to admit that I’m not current on Canadian tax laws, so I have a question. Does it make more sense to put your income bearing instruments (your bonds) into your tax sheltered accounts, while putting equities in the taxable account? To me, your TFSA account would be a great place for bonds, rather than equities. What am I missing?
Hey Andrew,
No worries, and trust me, I’m not tax expert myself. I’ll try and answer your question.
Yes, it absolutely makes sense to put income bearing instruments like bonds in tax-sheltered or tax-deferred accounts since they have a heavier tax burden than Canadian equities. Canadian dividend income is quite tax efficient (as you probably know), so there is little tax burden if these investments are in a taxable account. Now, to my rationale for doing almost the opposite: if I didn’t already have a substantial bond allocation in my RRSP, nor a defined benefit pension plan at work, I’d probably have some more bonds in my TFSA, probably XBB or XSB in particular. Because I feel my bond allocation is already pretty healthy in my RRSP, over 30% and I have that pension, I feel I can take on more risk with my TFSA; getting the higher yield via equities in the process. I have a plan to slowly move some of my Canadian dividend-payers into my TFSA over time. Based on current TFSA contribution limits, that will take me another 15 years. I don’t mind, because for this time period I will be taking advantage of the tax credit in my unregistered accounts.
Back to you, you’re not missing one thing Andrew. I think it would be great strategy for many folks to put some bond ETFs from Claymore or iShares in their TFSA and mix that up with a healthy does of equities. I might do the same in another 15-20 years, add some bonds to the TFSA, but for now I’m in my accumulation phase and because of it I think I’m better off taking advantage of equities in my TFSA for some time to come.
I hope I answered your question? Any thoughts on my TFSA strategy?
Mark, I always find reading your blog very inspiring and educational. It’s great to see that your portfolio is yielding and compounding more and more each year! You’re certainly on the way to your financial freedom!
@Elemag – thanks for stopping by. Glad you are enjoying my journey and finding it inspiring! Slowly, the portfolio is growing. It’s taking time though but nobody said progress was instantaneous. Keep checking in 🙂
It sounds like you have a great plan Kevin!
@RoseInToronto,
Thanks for commenting on my blog. Context, I will provide….
While I do have about $15,000 in my TFSA, I certainly do not have $4,500 in total income coming from it yet. Someday….
Income from TFSA is closer to $700 per year. The rest of the passive dividend income comes from my unregistered stock portfolio; banks, utilities and telcos. Over time, my plan is to move my unregistered stocks into my TFSA. Same for my wife. That way, long term tax-free dividend income for years and years to come.
I hope that helps clarify and in future, I will do my best to make these dividend income posts more clear 😉
@DIY Investor
Pros and cons to everything I guess Robert. Personally, I REALLY like getting free shares via DRIPs. I don’t have to lift a finger and my money is always working for me. Hopefully it will always be that way 😉
@Dividend Mantra
Thanks very much for the support! Slowly but surely. Keep up the good work yourself!
I am aiming for a high savings rate, since if I can live reasonably on half my income or so, then financial independence will be achieved that much sooner. Working on increasing income as well. 🙂
You’ve got a great strategy. Many times people let their dividends build up in cash. With DRIPs and zero commission ETFs this doesn’t have to be the case,
Mark,
Great job on the earnings! The numbers are getting bigger….keep it up!!!