August 2018 Dividend Income Update
I don’t really care how often you read or hear that “a million dollars ain’t what it used to be” – thanks to inflation. Let’s be honest, that’s still a HUGE chunk of change…for us…
…And we’re working our way towards that amount. Slowly. Month-by-month.
Using our tortoise versus the hare hybrid investing approach:
- Owning established companies that pay dividends every month or quarter, and tend to raise those dividends at least once per year. You can read about dividends more here.
- Owning some low-cost Exchange Traded Funds for income (via distributions) and growth – to own hundreds or thousands of companies from around the world. You can read about ETFs more here.
So you know how I invest. It’s for the most part, boring. Now, a recap of where:
- TFSAs provide tax-free investing power
Although Tax Free Savings Accounts (TFSAs) have only been around for about 10 years, they are a considerable wealth building tool if used properly. Think about it: tax free money. Do you really want your money just kept in cash savings? I suggest you make your money work for you.
We own a number of Canadian dividend paying stocks inside our TFSAs and we’ll continue to do so.
Why?
Example: a 30-year-old working professional who starts investing their $5,500 (this year’s annual contribution limit) and continues maxing out their account contributions for the next 40 years could retire with a $1-million in the TFSA alone! A tax-free million. Geez.
We work hard to maximize contributions to our TFSAs every year. We’ll continue to do so. If we keep doing this we’re optimistic our TFSAs will be worth over $100,000 each within the next 5 years.
Dividend income earned from our TFSAs is part of these monthly income updates. Dividend income earned (tax-free) is helping us slowly reach semi-retirement.
- Non-registered investing accounts provide some tax benefits thanks to the Dividend Tax Credit
Did you know you can earn about $50,000 per year in dividend income in Ontario, inside a non-registered account, and pay pretty much zero taxes on that income (if you have no other income to report)? For those that like math, check out this site for proof. This is thanks to the Canadian dividend tax credit, which you can read about here.
Since we’ve been fortunate enough to max out our TFSAs (see above) and my RRSP for many years, we invest in Canadian dividend paying stocks inside our non-registered account – and we’ll continue to do so.
Dividend income earned from this non-registered account is part of these monthly income updates. Tax-advantaged dividend income earned (via the dividend tax credit) is helping us slowly reach semi-retirement.
- RRSPs are awesome tax-deferred growth machines
Owning a number of Canadian dividend paying stocks might be fine, but it’s not like there isn’t a HUGE investing world out there. Canadian stocks represent 3-4% of the world economy. If you’re only investing in Canada, you might be missing out on bigger returns from the rest of the 96-97% of the world economy.
This is why we also invest in a number of U.S. dividend paying stocks but more and more over time, we’re owning more units of U.S.-listed Exchange Traded Funds (ETFs) for income and growth that can occur from around the world.
Registered Retirement Savings Plans (RRSPs) have been around for decades. The RRSP offers tax-deferred growth as long as you keep the account open with various assets in it. There are more details about the RRSP to take advantage of here.
Example: taking our 30-year-old young professional again, he/she who starts saving $3,000 per year and contributes this amount every year to their RRSP without fail will likely find more than $250,000 inside their account at age 60.
We pay ourselves every month and contribute to our RRSPs, where we can, like clockwork. My RRSP is maxed out of contribution room. My wife’s RRSP has some contribution room left, a gap we hope to close in the coming year or so.
Dividend income and distribution income via the ETFs earned from within our RRSPs is not part of these updates. Maybe eventually I will change my mind but for now, it’s out of scope!
The summary
I believe investing is largely a get wealthy eventually strategy.
For us it is done through focusing on contributions to our TFSAs first, then making regular contributions to our RRSPs, and finally investing where we can after that. Across all accounts we buy and hold investments, we reinvest dividends, and we stay the course as much as we can.
We believe with this slow and steady process we will help us reach our lofty $30,000 per year dividend income goal – for semi-retirement – inside our TFSAs and non-registered account. To supplement this income, we hope to have some assets to draw down inside our RRSPs.
At the time of this post, our spreadsheet tells us our dividend income should be more than $16,700 in tax-free and tax-efficient income this calendar year. That’s $1,700 more than this time last year thanks to sticking to our plan. Boring is a great word when it comes to investing.
At the end of the day, letting our investments do their thing (over time) should help us realize our financial goals. This blog is meant to keep you posted on that journey. Stay tuned.
How do you use/invest with your TFSA? How do you use/invest inside your RRSP? Are you investing in other ways to realize your financial goals? Real estate perhaps? Share in a comment below.
Thanks Mark and thanks guys for the replies,
Mark I would like to know your opinion and the readers here on the site about real estate , I have a rental property and i’m kind of debating whether to keep it and avoid being in high tax bracket in retirement ( 18years to go :)) or sell it and invest the money by maximizing my rrsp and my wife’s and open up a tfsa for me and her and also maximize it .
the property did really well in my view , bought in 2001 for 145k and now worth about 750k and of course it’s mortgage free .
I wonder if someone in here retired and have a rental property i would like to know how adding up your investment will affect your government investment.
i know the site is for stocks and investment only but i believe that we can’t hide the fact that real estate specially here in Canada has been in some way a great wealth generator along with stocks .
so yeah if someone can share their experience it will be great .
Thanks
Well Gus, FWIW, we used to have a rental property ourselves. All income from rental properties are taxed at your marginal rate – but I think I know what you mean in that you can offset some rental expenses against the rental income to reduce net income and therefore taxes owed.
“the property did really well in my view , bought in 2001 for 145k and now worth about 750k and of course it’s mortgage free.”
I’ll say. I think being a property owner is more than a financial decision. Do you have someone around that can fix things when they break? Are you comfortable with tenants coming and going? Is the property going to continue to appreciate in value? Is that value comparable to the income of other other sources (i.e., stocks)?
On the last point, $750k invested in a bunch of stocks/dividend paying stocks/even broad-market ETFs should yield at least 3% on $750k invested = $22,500 cash flow. Easily. As long as you feel you can earn at least that net income then maybe better off with rental, income-wise at least.
Lastly, the other thing to consider is capital gains. Although this can be an efficient form of tax you’ll have to pay it eventually on your rental.
Those are just some of the considerations top of mind! 🙂
Thank you all for your replies as it help me more and more to understand the DIY investing strategy and make it clearer . there’s for sure a lot of things to learn ,
@RBull 59 , I won’t listen to my coworker because I’ve read couple of books for john c bogle which is why i dumped my advisor and started indexing and maybe some good canadian stocks in the coming year.
a lot of wisdom on this site for sure.
Thanks for being a fan Gus. If you have questions, I can potentially turn any into a blogpost for you and others. Just let me know.
Good stuff. Best of luck.
Gus I should have mentioned to look into getting your taxes reduced at source (employer) using one of these forms rather than waiting for a refund. Then you can invest into your TFSA right away with your extra net income.
https://www.canada.ca/en/revenue-agency/services/forms-publications/forms/t1213.html
BTW, I think i recall your earlier posts and should have known you woudn’t pay much attention to your coworker.
Thank You so much guys for your time and advise ,
RBull trust me I won’t listen because i simply like what I’m seeing in my portfolio specially the dividend part and the diversification , as for the RRSP thanks for the reassurance as I keep on hearing people favoring TFSA over RRSP , I currently don’t have a TFSA account which i’m thinking of opening one and have my tax returns invested in it .
Hey Gus,
I remember I didn’t answer part of your question. TFSAs are a killer wealth building tool for all Canadians. RRSPs are also a great wealth building tool for some Canadians – depending upon your tax bracket of course. I can’t necessarily say which is better for you but I would hazard a guess if you maxed out both accounts, for many, many years on end – you’ll be happy with the financial results!
Good to read Gus.
I would agree with Mark that ideally max both out.
I have seen calculations comparing results for RRSP and TFSA using the same taxes and amounts. They are equal. No doubt the government planned this. The TFSA feels better because you can watch it grow knowing you pay nothing when withdrawing (at least for the time being), however you have invested with after tax dollars, and likely at higher rates during years of employment. The RRSP will have a slight advantage if you have a higher tax rate now than when you withdraw. However no one knows their future income or future tax rates and it may be higher than planned, negatively affecting the benefit. Conversely if someone has a lower income to start with they are better off to wait to contribute to RRSP when employment income and benefit is better and/or contribute just to their TFSA.
For us fortunately so far in retirement we’re able to withdraw from my RRSP now at lower tax rates than working and use these funds to contribute to my TFSA, as well as for regular expenses.
That’s the linchpin in the debate – “For us fortunately so far in retirement we’re able to withdraw from my RRSP now at lower tax rates than working and use these funds to contribute to my TFSA, as well as for regular expenses.” That helps make the RRSP vs. TFSA – otherwise it’s a dead heat.
As is of course managing the RRSP-government loan (re: RRSP refund)
https://www.myownadvisor.ca/managing-the-refund-well-is-the-linchpin-in-the-rrsp-vs-tfsa-debate/
Both are great benefits people are wise to take advantage of. Although as in many investing issues a persons situation will dictate which of them “may” (key word) work a little better at different points in their life.
I think our tax rate will rise with increased future income (good), bracket creep and simply govts needing more (both bad). However a good problem to have if things continue to work according to plan.
Yes, for a person to gain full benefit of their RRSP contribution they need to invest the equivalent of their refund amount or simply continue to max their RRSP. If a person can, it’s probably better to just have taxes reduced at source and make regular investment contributions, so you’re investing a bit earlier and “paying yourself first”.
Back home now. We were ready to stay longer. Wonderful trip.
You’ll have to write and tell me about your latest epic trip while I’ve been trying to survive my latest project at work 🙂
Gus, don’t do what your friend does or says. He is badly misinformed on rrsps which raises a serious question and as a gold bug is a speculator not an investor. Everything in one asset is also a very risky strategy, especially gold which no one can predict the direction of, does not pay dividends or interest in the meantime.
I have contributed for 25+ yrs and am now withdrawing rrsps the last 4 yrs. They’re not double taxed and it is not a scam.
Hello Mark,
I have a quesiton for you and your experienced blog readers 🙂 it’s regarding gold investing vs stocks.
I had a chat with a coworker regarding investing/rrsp/tfsa and all that , he simply can’t stand the word rrsp as he believes that it’s the government biggest scam to double dip on taxes during your working and retiring years, anyways we were talking about stocks and apparently the only thing that he buys is gold and that is physical gold not etfs or stocks , he told me that he bought an ounce of gold in 2000 for about 400$ and today it’s worth over 1800$ so that’s about 400% plus in increase and that is no match for the s&p500 which is about 180%.
Looking at these charts i really didn’t know what to say unless i’m really missing something here ,please guys enlighten me because i wanted to make a good argument but like i said seeing those charts left me in a shock .
I would really like to know if someone here invest or buys gold and for you Mark what’s your take on gold investment.
Thanks
Hi Gus,
As with any investment, the investment window returns give a “it depends” answer.
“Over the past 30 years, the price of gold has increased by 335%. Over the same period, the Dow Jones Industrial Average (DJIA) has gained 1,255% and the Fidelity Investment Grade Bond Fund (FBNDX) has returned 672%.
Over the past 15 years, the price of gold has increased by 315%, roughly the same as the 30-year return. Over the same period, the DJIA increased by 58% and the FBNDX returned 127%, which are both significantly lower than their 30-year returns. These returns can be largely attributed to speculative bubbles that occurred in the late 1990s.”
https://www.investopedia.com/ask/answers/020915/has-gold-been-good-investment-over-long-term.asp
Personally, I don’t invest in any gold although I know some investors that do because they feel, in a very bear market (significantly down) that gold prices tend to climb far greater than stocks and that’s a hedge against bad, prolonged, markets.
Good job producing accurate numbers. I knew the claims were wrong but didn’t bother finding a reference source.
Those using gold as a non correlated hedge vs stocks in a diversified portfolio I think are more in the 5% of overall assets range. I prefer a more traditional mix of equities, bonds, gics.
Gus, I used “friend” but should have said co worker.
I can’t make any kind of informed comment on gold vs equities as I have never bought nor looked at gold as an investment. I can comment on people using apples to oranges comparisons. For example, if a person were to look at gains in holding an income trust purchased a few days before the massacre, versus a purchase after the blood had been let, you would find that just a few days difference on acquisition will likely show a huge difference in gains/losses. IOW, one can make adjustments to any kind of hindsight analysis and come up with different numbers.
As for RRSPs, they are a tool that can be beneficial to some investors and not so helpful to others, it depends.
Solid progress Mark. The two of us think alike when it comes to dividend income. 🙂
Well yes we do 🙂
Thanks for the update Mark. I’ve forwarded your emails to friends and family with a suggestion to follow you. Having a retirement plan/goal is half the battle! You lay out your goals simply and straight forward. And, you also suggest a strategy (buy and hold good dividend paying equities). This stuff should be taught in our schools!
I think that’s the thing Paul. I’ve tried to create a plan with my wife that a) meets our projected income needs but also b) matches my/our personality in terms of less tinkering with the portfolio. I feel my hybrid approach is working, slowly, for that reason.
The hardest part of planning is actually sitting down and doing some of the planning. Most folks regardless of personal finance or anything else in their life couldn’t care less – that’s my experience. Folks assume things will magically happen.
Well thought out.
Well said on planning vs magic. Most people we know are retired well but some have a freedom75+ “plan” by default…..a hope for that or better.
Paul, I agree saving and investing should be taught in schools, and that getting started with a plan is a big part of the challenge.
Nice job on trying to help others with this.
“For us it is done through focusing on contributions to our TFSAs first, then making regular contributions to our RRSPs, and finally investing where we can after that. Across all accounts we buy and hold investments, we reinvest dividends, and we stay the course as much as we can.”
You projected Income increase for the year is 11.33%. Too bad your salary doesn’t increase at that rate.
Ha. Ya, I wish it did cannew 🙂 Hopefully only 5 or more more years of full-time work at my current job. We’ll see…
Ha, loftier retirement goals than age 70 or freedom 75 indeed.
I agree that your plan is achievable and designed around a reasonable age target too. It’s also been consistent, methodical and balanced between living well now and creating a great lifestyle into retirement. Keep up the good work and fine example for others.
The 50k dividend number is thrown around a lot but I can’t see many who reach that individually or that have no other (retirement) income. Its a nice benefit/target regardless. Although I wonder how provinces with enormous growing debt obligations can continue to offer such generous tax considerations. (It’s about 31k here). Looks like my wife’s home province may be the first one headed for bankruptcy.
Earning $50k per year from the portfolio would be outstanding – but who knows if I will reach that. I’m optimistic in 10 years though. Killing our debt while investing will be very important since I absolutely do not want to start any part-time work without being debt-free.
I suppose if I cashed in our non-reg. account we could be debt free now but a) I would have capital gains to deal with and b) I would lose any future income dividend growth from that part of our portfolio. Not the best idea.
As for provinces going broke, Ontario isn’t far behind.
Smart on the no debt before semi retirement, and likely best not to tap unregistered to accomplish that.
50k portfolio income generated in 10 years would be a great accomplishment.
Too much govt, personal, corporate debt now but best to focus only on what a person can control like youre doing.
Exactly. I can’t control inflation, general taxation, government spending plans, what the workplace will do with me, etc.
I can simply save, invest – max out TFSAs, max out RRSPs and kill debt. Boring stuff really.
I comprehend the thought process but a 30 year old retiring in 40 years? Methinks we might set our goals a bit higher than that. 😉
One thing I really like about your plan Mark is that it is reasonable, achievable and well thought out based on sound financial reasoning without knocking yourself out. All at a young enough age. Too often people do not get this financially wise until we’re too old. Well done.
Thanks Lloyd. Always appreciate the commentary here and your perspectives.
Yeah, I could have put the numbers far sooner than 40 years old but I heard another co-worker exclaim the other day “I’m on the freedom 75 plan”. I just smiled and kept walking. Hell no, not me.
I should have mentioned flexible as well. You’ve baked in some flexibility in the event of variances. If you have to work an extra year or two, so be it. As you know, I am a big advocate for having options.
Indeed. Financial options are good in life, better than too few!