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 personal investment portfolio excluding workplace pensions, ignoring our government pensions (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 milestone, without debt, we should be financially independent for life.
Financial Independence Articles
You can follow this approach as well.
Here are some articles that relate to our lofty investment goal and why:
A major part of our investment strategy is via dividend investing in some key accounts.
Here is our chart updated as of end of December 2019:
You’ll see around $31,000 the chart stops.
That’s because we believe reaching our goal of earning $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.
Here are some examples of what we believe dividend income (along with dividend increases every year) should cover in 2020 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, 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 only stable, well-established companies tend to make regular dividend payments.
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 during times of market jubilance, leveraging stock price appreciation. This may or may not appeal to some investors.
Why I love dividends…
- My portfolio will be working for me; I don’t have to work for this income stream.
- This approach helps me psychologically for a buy and hold approach regardless of what the stock market does.
- 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 on money management fees by owning the same stocks that the big funds own (unlike mutual funds or ETFs where I pay a money management fee).
- Canadian dividends are very tax-efficient in a non-registered account. This makes this account a great home to own them in long-term while I fill up my RRSP with U.S. assets. U.S. assets diversify my portfolio beyond Canada’s oligopoly borders.
- I believe living off dividends can help reduce any worries about when to sell stock shares in any down market. I can simply take the dividends as cash and live off that.
- It’s a great complement to my buy and hold ETFs approach 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 just over $30,000 per year (after-tax) based on my table above. 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. We hope to have $500,000 invested in those accounts to spend about $20,000 per year in our 50s. You can see from taxtips.ca information that $500k invested inside an RRSP, 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.
We want to give back.
This means I don’t believe in early retirement or really retirement at all in the traditional sense. Instead, I believe in financial independence including working on my own terms.
So, our income plans in semi-retirement start to look like this:
- 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 money.
- We will start withdrawing at least $20,000 or more per year from our RRSPs starting in our 50s. That money will cover many basic expenses, so, we’ll need another…
- ~$20,000-$30,000 per year in either part-time income if we choose to keep TFSAs intact and/or we’ll work part-time anyhow to cover to our expenses, including some contingencies or buffer for international travel.
Can we live on about $70,000 per year? Absolutely!
We figure this is our healthy, after-tax income spend for semi-retirement starting in our 50s. 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 65 to avoid any 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 that income replacement will 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.
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 buy Canadian and U.S. companies that pay dividends.
- I don’t own any company at this time that doesn’t pay a dividend.
- I have a bias to owning companies that have a long history of increasing their dividends over decades or even generations.
- 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.
What Canadian stocks do I own?
Most of the same stocks in the big mutual funds and ETFs of course.
Look at huge ETFs like XIU and XEI and VDY. They own the very same stocks in different amounts!
Here is the top-10 in XIU ETF as of summer 2019:
- 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 need to bank and 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 too. I think you get the idea by now…
I also own a number of Real Estate Investment Trusts (REITs). Examples include REI.UN, HR.UN, CAR.UN, CHP.UN. I‘ve basically unbundled REIT ETFs like ZRE, XRE and ZRE to own those companies directly. Again, I tend to own what the big funds own. I don’t pay any money management fee to do so.
My investing process is rather simple really.
- Buy and hold these dividend paying companies and REITs.
- Reinvest dividends paid.
- Relax. Do nothing. Wait.
- Reinvest dividends (again) when they are paid next month or next quarter.
- Wait some more. Watch more income roll in. Reinvest dividends 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 for low-cost investing, to help simplify my portfolio, to sleep easy at night knowing I own hundreds of 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. These are companies I purchased many years ago and I continue to reinvest dividends every quarter with:
- Johnson & Johnson (JNJ)
- Pfizer (PFE)
- Procter & Gamble (PG)
- And a few more.
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.
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 the intention to own a few U.S. stocks inside my RRSP I invest in low-cost U.S.-listed 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 and will not hold 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
Non-registered account: Canadian dividend paying stocks.
TFSAs: Canadian dividend paying stocks and Canadian REITs.
RRSPs: U.S. dividend paying stocks and U.S.-listed ETFs.
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