This blog is about saving and investing my way beyond a $1 million portfolio.
…and dividends are going to continue to help us…
Beyond this milestone, without debt in the coming years, we should be financially independent for life.
Financial Independence Articles
Here are some selected articles that relate to realizing this investment goal!
This is my comprehensive Financial Independence Plan.
A major part of our investment strategy is dividend investing in some key accounts. Read on below why.
I update this chart at the end of every year – I’ve highlighted our target for this year:
You’ll see the chart eventually 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 huge annual income milestone, we’ll draw down our RRSP assets strategically as we work part-time in semi-retirement. Those withdrawals should over the rest of our needs.
What could about $30,000 in dividend and distribution income earned per year cover?
Here are some examples of what we believe this income could cover in today’s dollars.
You’ll see we focus on the big 3: food, housing and transportation.
|Basic Expenses||Per Month||Per Year|
|Food/groceries – including the odd take-out night||$750||$9,000|
|Condo fees (building insurance, maintenance)||$600||$7,200|
|Condo property taxes – City of Ottawa||$600||$7,200|
|Condo utilities, and cell phones, internet, subscriptions (e.g., Netflix), etc.||$400||$4,800|
|X1 auto* expenses (gas ~ $25 per month), maintenance, insurance)|
*May or may not own a car long-term.
|Insurance + healthcare||$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 (and distributions) 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 and distributions paid (which I do) to buy more shares or ETF units, commission-free, without paying any money management fees to do so. More shares or units owned will payout more dividends and distributions 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 taxable account a great home for Canadian stocks. I will 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 some degree can help reduce any worries about when to sell stock shares or ETF units in any down market during semi-retirement. I can simply take the dividends and distributions as cash and live off that.
- Earning dividends is a great complement to my buy and hold approach using 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 RRSP assets strategically starting in our 50s as we work part-time.
You can see from taxtips.ca information that $500,000 invested inside an RRSP, at age 55, and 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.
Our income plans in semi-retirement start to look like this in our 50s:
- Optimistic we’ll earn about $30,000 per year in dividend income from our non-registered account + tax-free accounts (x2) to cover most basic necessities of life – should we choose to spend that TFSA money**
- More than likely, we will start **withdrawing about $20,000 or so per year from our RRSPs starting in our 50s to reduce the tax liability that is our RRSPs over time. We will leave our TFSAs alone.
- So, between the non-registered income and RRSP withdrawals that should deliver about $50,000 per year.
- We hope to earn >$20,000-$30,000 per year in any part-time income, blog income, other to cover other wants.
- We intend to keep our TFSA assets largely intact for the coming decades.
- We will use any part-time work income to enjoy as mainly a travel fund in semi-retirement.
The sum of “living off dividends” (taxable account + RRSPs) and some part-time work adds up to about spending $70,000 per year in our 50s and beyond.
Can we live on about $70,000 per year? Absolutely!
We figure this is our very 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 intend to 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 to avoid any major early retirement withdrawal penalties.
Check out some of my thinking as part of My Financial Independence Plan. I hope to update this post every year going-forward.
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 already know based on our work history to date, CPP + OAS will pay us at least $1,000 per month, each, starting at age 65 without any more contributions to CPP.
- Deferring CPP and OAS will maximize those payment benefits and pay us even more if we defer them.
I see our government benefits in our senior years as some tasty icing on our financial cake 🙂
I’m purposely not relying on CPP or OAS to cover any basic living expenses.
My Boring Dividend Investing Approach
- I focus on owning Canadian and U.S. companies that pay dividends to complement my ETFs.
- 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 stocks frequently.
- 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 stocks do I own?
Let’s talk Canadian first.
I own most of the stocks many of the big Canadian ETFs own. Here is one of my favourite Canadian funds. Here are the top holdings in XIU ETF (my Canadian benchmark) at the end of December 2020:
I own many of the same stocks, some examples:
- Banks (RY, TD, BMO and others).
- Insurance companies (such as MFC).
- Pipeline companies (ENB and TRP).
- Telecommunications companies (like Telus).
- My only oil & gas integrated energy company: Suncor (SU).
- Utilities (such as FTS, AQN, INE).
- There are also industrial and material companies in my portfolio (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. I own those companies as well; Enbridge (ENB) delivers our natural gas.
People love their cell phones and internet so I own Bell and Telus.
We need to ship goods across our vast country, efficiently, so I own a railroad.
I think you get the idea by now…!
What U.S. stocks do I own?
In recent years I’ve gravitated to owning more ETFs although I continue to own a few U.S. stocks primarily for consistent dividend income and dividend growth:
- Johnson & Johnson (JNJ)
- Procter & Gamble (PG)
- BlackRock (BLK)
To summarize my investment strategy with stocks:
- Buy and hold these dividend paying companies. Index invest the rest for growth.
- 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 and it has absolutely worked!!
Asset Location – What do I hold where?
I hold many Canadian dividend paying stocks my 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 held in a taxable account (meaning, outside TFSA and RRSP accounts).
I keep a few U.S. dividend paying stocks in my RRSP. Why?
Like I wrote 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%). On that note, some considerations for you and how I personally invest:
- 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. (I don’t do that.)
- 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 taxable 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.
*NEW* I now also keep some low-cost ETFs inside my TFSA. Why?
At the end of the day: total return that matters. So, for lazy investing in thousands of stocks from around the world, I own some low-cost ETFs inside my TFSA to diversify away from Canada’s borders for long-term, tax-free growth.
Other Asset Location Articles!
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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