This blog is about saving and investing my way to a $1 million portfolio.
I know this sounds very ambitious but you know what? We’re almost there…
The $1 M portfolio goal is our desired, combined personal investment portfolio excluding workplace pensions, excluding our Canadian government benefits (like Canada Pension Plan (CPP) and Old Age Security (OAS) at age 65), and also ignoring any part-time work including some meager-less-than-minimum-wage-income that comes from this blog.
Once we hit that $1 M milestone, without debt, we should be financially independent for life.
Financial Independence Articles
You can follow this financial independence approach as well.
Here are some selected articles that relate to our lofty investment goal – that we’ve almost realized:
A major part of our investment strategy is dividend investing in some key accounts. Read on below why. Here is our chart updated as of end of December 2019. I’ll update this chart later this year in 2020.
You’ll see around $31,000 the chart stops.
That’s because we believe reaching our goal of earning about $30,000 per year inside our tax-free (thanks TFSA) and tax-efficient (taxable) accounts will cover most of our basic living expenses for as long as we live.
In addition to this $30,000 per year milestone, we’ll draw down our RRSP assets. Those withdrawals should over the rest and extras in life!
What would $30,000 in dividend income earned per year cover?
Here are some examples of what we believe dividend income from our non-registered and TFSA accounts (along with dividend increases every year) should cover in today’s dollars:
|Basic Expenses||Per Month||Per Year|
|Food/groceries – including the odd take-out night||$600||$7,200|
|Condo utilities (heat, hydro, water) + telcos (internet, TV, cell phones, other)||$500||$6,000|
|Condo property taxes – City of Ottawa||$500||$6,000|
|Condo fees (building insurance, maintenance)||$600||$7,200|
|X1 auto expenses (gas, maintenance, insurance)||$250||$3,000|
|Healthcare (various, including insurance)||$250||$3,000|
Why do companies pay dividends?
When a corporation declares a dividend, the company’s retained earnings decrease and its current liabilities increase. When the cash dividend is paid, the corporation’s cash account decreases. Dividend payments directly reduce a company’s earnings, so usually stable, well-established companies tend to make regular dividend payments. You really can’t fake them for every long!
Companies use dividends to pass on their profits directly to shareholders. They certainly don’t have to but many companies do. A few reasons come to mind for me:
- Reason #1 – it is core to company strategy. Potentially there are no current companies to acquire, maybe company debt is under control, and/or there is already a healthy stream of cash to begin funding new company products or services. Thus, as part of company strategy to reward shareholders – the board of directors feels it’s simply one of the best things to do with company profits over time.
- Reason #2 – the company is on sound financial ground. Most companies that pay a dividend, especially long-term (as in decades) have a stable business model. You really can’t fake dividend payments for very long. Companies that grow their dividend tend to have great cash flow – profits. As an investor, it’s to your advantage to own shares in a company that makes large profits, consistently, with time. A reliable dividend is essentially one very good sign of business strength. This is because unstable companies cannot divert profits directly to shareholders for very long.
- Reason #3 – they want to attract investors. This is akin to company strategy. Some investors are more speculative and like risks (note: this is not me). Dividend-paying companies can attract a certain type of investor; one who prefers cash in hand versus the hope of capital gains. Such investors like the idea of earning income from their investments the same way people go to work to earn an income – it’s dependable. Over time the work is performed by their portfolio. The portfolio will pay out MORE income over time if you reinvest dividends and/or you hold such dividend paying companies long enough whereby dividends are increased by the company every year or so. Companies know there are investors out there who put a bias on income generated from their portfolio over growth.
- Reason #4 – companies know investors like optionality. You see, in a perfect world, all businesses would allocate capital in a way to perfectly maximize the return on that capital. This would be done so reinvested money would go back into the business in way that pays off immensely for the shareholder (by increasing returns over time AND by continually reducing the company’s tax burden). But you should know by now we don’t live in a perfect world. This means shareholders have over time demanded a dividend – for the purposes of “optionality”. That old link I provided above tells us shareholders like optionality – and dividends provide that optionality – to give investors the choice to increase or decrease their exposure to the business. Reinvested dividends therefore, take advantage of that optionality, to increase exposure. Dividends taken as cash, do not.
Dividends are therefore one very important part of an investor’s total return. An investor could technically create their own dividend (income stream) by timing the sale of their stock shares. This may or may not appeal to some investors. Ultimately total return matters.
Why I love dividends…
- My portfolio will be working for me. Income just happens.
- This approach helps me psychologically for a buy and hold approach regardless of what the stock market does including 20% or 30% declines.
- I can reinvest the dividends paid (which I do) to buy more shares, commission-free, without paying any money management fees to do so. More shares owned will payout more dividends next time. Read up on DRIPs here.
- I save money on fund management fees. I own many of the same stocks the big funds own – and pay no management fee to do so!
- Canadian dividends are very tax-efficient in a non-registered account. This makes this account a great home for Canadian stocks. Then, I use my RRSP to hold U.S. assets including low-cost ETFs. My U.S. assets help me diversify my portfolio beyond Canada’s oligopoly borders.
- I believe my goal to “live off dividends” to a degree can help reduce any worries about when to sell stock shares in any down market or semi-retirement. I can simply take the dividends as cash and live off that while keeping a modest cash wedge for retirement.
- It’s a great complement to my buy and hold approach with low-cost ETFs for long-term growth. You can read about my favourite, best, low-cost ETFs to ride market returns here.
Can we live on just $30,000 in dividends per year? No.
I already know our needs and wants will exceed $30,000 per year.
Thankfully, we’ll have more assets to spend and we’ll eventually draw down our capital too.
Our plan is to draw down our RRSPs in our early 50s and throughout our 60s.
We hope to have $500,000 invested in those accounts by ages 50-55. You can see from taxtips.ca information that $500k invested inside an RRSP, even at age 55, drawing down only $20,000 per year should last us at least 30 years with a meager 5% rate of return.
Can we live on $50,000 per year? Very close.
While $50,000 per year is a solid start for many couples in retirement or semi-retirement, we’ll still work.
Why on earth would we do that???
We want to keep our bodies and minds active.
We want to be contributors to society.
We want to be productive and help others.
This means I don’t believe in “retire early” mantras. Instead, I strongly believe in financial independence including working on my own terms.
So, our income plans in semi-retirement start to look like this in our 50s:
- Earning about $30,000 per year in dividend income from our non-registered account + TFSAs will cover most basic necessities of life – should we choose to spend that TFSA money.
- We will start withdrawing about $20,000 or more per year from our x2 RRSPs starting in our 50s. That money will cover many basic expenses, so, we’ll need another…
- Earn ~$20,000-$30,000 per year (or more?) in part-time income to cover other wants.
I figure as long as we have part-time work, we’ll keep our TFSAs intact. Part-time work will cover basic expenses. TFSAs can build up over time.
Can we live on about $70,000 per year? Absolutely!
We figure this is our healthy, after-tax income spend for semi-retirement.
If we can’t live on that, without debt, we have a spending problem not an income problem!
As RRSP assets disappear (throughout our 50s and 60s) we’ll also replace that income with our workplace pensions. Right now, our thinking is we’ll take my wife’s pension around age 55. I will preserve my pension until about age 60 or 65 to avoid major early retirement withdrawal penalties.
Essentially as RRSP assets disappear for good in our 50s and 60s they will be replaced by workplace pensions. We anticipate income from both pensions should be close to $45,000 per year for life.
What about our government benefits?
We’ll take Canada Pension Plan (CPP) and/or Old Age Security (OAS) at likely age 65 or later.
- We believe CPP and OAS will combined, pay us about $1,000 per month, each at age 65.
- Deferring CPP and OAS will maximize those payment benefits and pay us even more.
I see our government benefits in our senior years as some tasty icing on our financial cake 🙂 I’m purposely not relying on these benefits to cover any basic living expenses.
My Boring Dividend Investing Approach
- I focus on owning Canadian and U.S. companies that pay dividends.
- I have a bias to owning companies that have a long history of increasing their dividends over time.
- I reinvest the dividends paid every month and quarter.
- I try to avoid selling any company regardless how far the stock price falls. If anything I buy more stock when prices tank. It’s like getting stuff on sale.
- I use low-cost Exchange Traded Funds (ETFs) to invest in other countries from around the world to further diversify my investments. I do this because dividends aren’t everything. There is nothing magical about dividends – but they do matter because they help me with my plan.
What Canadian stocks do I own?
Most of the same stocks in the big mutual funds and ETFs of course. Here is one of my favourite Canadian funds. Here is the top-10 in XIU ETF as of summer 2019:
I own many of the same stocks:
- Banks (examples: RY, TD, BNS, BMO, CM).
- Insurance companies (examples: SLF, MFC, GWO).
- Pipeline companies (examples: ENB, TRP, IPL).
- Telecommunications companies (examples: BCE, T).
- Energy companies (like SU).
- Utilities (examples: FTS, EMA, AQN, CU, CPX, INE, BEP.UN).
- There are also industrial and material companies in my portfolio (examples: CNR, NTR).
Basically, I buy companies that people need. People borrow money, so I own banks.
People need insurance, so I own insurance companies.
Last time I checked people want to heat and cool their home(s) in Canada so I own those companies since Enbridge delivers our natural gas. I think you get the idea by now…
I also own a couple of Real Estate Investment Trusts (REITs). Examples include REI.UN and CAR.UN.
My investing process is rather simple really.
- Buy and hold these dividend paying companies. Index invest the rest.
- Reinvest dividends paid.
- Relax. Do nothing. Wait until next month or next quarter.
- Reinvest dividends paid (again).
- Wait until dividends are paid again.
- Rinse and repeat until wealthy.
It’s what I call my get wealthy eventually plan.
What U.S. stocks do I own?
In recent years I’ve gravitated to owning more U.S.-listed ETFs like ITOT and VYM for low-cost investing. I also own a bit of low-cost Canadian ETF XUU.
I do this to sleep easy at night knowing I own hundreds of U.S. stocks for a very low fee.
However, as you know by now, I also like growing dividend income. So, I will continue to own just a few U.S. stocks for dividend income and dividend growth. I own the following U.S. stocks among others:
- Johnson & Johnson (JNJ)
- Pfizer (PFE)
- Abbvie (ABBV)
- Procter & Gamble (PG)
- Southern Company (SO)
- Microsoft (MSFT)
- BlackRock (BLK)
Asset Location – What do I hold where?
I hold Canadian dividend paying stocks in my non-registered (taxable) account and inside our Tax Free Savings Accounts (TFSAs). Why?
Canadian dividend-paying stocks receive favourable tax treatment from our government. These stocks 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 (taxable account) and tax-free (TFSA) dividend income and earn about $30,000 per year (or more) from that.
I keep a few U.S. dividend paying stocks in my RRSP. Why?
Like I wrote to you above, I hold a few U.S. blue-chip stocks for U.S. dollar income and long-term growth. Unfortunately U.S-dividend paying stocks do not receive any favourable tax treatment from our Canadian government. I keep U.S. stocks inside an RRSP to avoid paying any withholding taxes (15%).
Other than owning a few U.S. stocks inside my RRSP I invest in low-cost, broad market ETFs. We will continue to use ETFs more over time inside our RRSPs leading up to early retirement.
Rules of thumb – What to invest where?
I do not own U.S. stocks in a Canadian non-registered account. Why?
- 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 at time of tax filing).
When you hold U.S. stocks in a non-registered account:
- There is 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. So, if you’re going to hold any U.S. assets in a taxable account – hold stocks that pay no dividend and very little dividends or distributions. Thankfully, for U.S. stocks in non-registered accounts, you get a credit for the amount withheld when you file your tax return. 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 or RRSP exclusively. 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.
My Asset Location Preferences
Looking for more dividend inspiration?
For years, I’ve been inspired by one of Canada’s oldest and most trusted dividend investing sites, Million Dollar Journey. Check out that resource for the best dividend stocks to own and how dividend investing can be part of your get wealth eventually strategy like mine.
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