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.
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!
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.