Welcome to my Dividends page.
This blog is about saving and investing my way beyond a $1 million investment portfolio for us and we use dividend paying stocks to help fund our semi-retirement plan.
Your mileage may vary. 🙂
Q&A with Mark: 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.
So, dividends are not magical. Dividends are not free. Dividends don’t fall from the sky.
Dividend payments directly reduce a company’s earnings.
But…usually stable, well-established companies that make higher profits over time 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. Companies that grow their dividend tend to have great, rising cashflow. 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 more 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”. 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.
Don’t take my word for it. See below:
An investor could technically create their own dividend income stream by simply timing the sale of their stock shares. There is nothing wrong with that.
Ultimately total return matters.
Q&A with Mark: Why do you love dividends so much?
Based on the above, a few reasons come to mind for me:
- Income just happens without selling shares.
- Optionality – I can reinvest the dividends and/or distributions as we wish. Or, spend the cash.
- Canadian dividends are farily tax-efficient in a non-registered account, to a point. This makes this taxable account a great home for Canadian stocks. I/we use our RRSPs to hold mostly U.S. assets.
- “Living off dividends” to some degree can help reduce any income worries about when to sell shares during any market downturn of 20% or 30%. You can of course make your own dividends.
- Earning dividends is a great complement to our buy and hold approach using low-cost ETFs that focus on capital gains. You can read about my favourite, best, low-cost ETFs to ride market returns here.
Q&A with Mark: Do you have a dividend income goal?
Fast forward into 2023, we’re investing beyond that milestone for semi-retirement since our plan is to live off part of the income from our portfolio and work part-time in our 50s.
Backing up though, that number was chosen because for many, many years, that number/that income per year, without any debt to start semi-retirement with, would cover most of our basic expenses from our taxable accounts and TFSAs to help “live off dividends” in semi-retirement as we work part-time / scale back over the coming years from full-time work.
That means income from our portfolio would cover basic expenses like food, shelter and taxes.
This is what I mean by basic expenses:
|Key expenses||Currently Monthly||Current Annually||Semi-retirement comments ~ end of 2024|
|Mortgage||$2,240||$26,880||We anticipate the mortgage “dead” by spring 2024.|
|Food/groceries||$800||$9,600||Although can vary month-to-month!|
|Food – dining/takeout||$100||$1,200|
|Shelter (home/condo maintenance/expenses)||$800||$9,600||Represents 1% home value per year, increasing by 3% inflation.|
|Home property taxes||$500||$6,000||Ottawa is not cheap, increasing by inflation.|
|Home utilities + internet/TV/cell phones, subscriptions, etc.||$400||$4,800||Project utilities to increase by inflation.|
|Transportation – x1 car (gas, maintenance, licensing)||$150||$1,800||May or may not own a car long-term!|
|Insurance, including term life||$250||$3,000||Term life ends in 2030, will self-insure without life insurance premiums.|
|Totals with Mortgage||$5,240||$62,880|
|Totals without Mortgage||$3,000||$36,000||As you can see, once the debt is gone, we’ll be in a much better place for financial independence!|
We figure we need to account for more things in life, like inflation and buffer too. This budget would be too restrictive.
So, add in more spending, other buffer (~$1k per month or so) and that makes our monthly budget closer to $4,500 per month without any travel and without any major capital expenses over time.
Since we’ve landed on our drawdown approach to semi-retirement, I’ve changed our reporting approach too.
More details below.
Q&A with Mark: what is your semi-retirement / drawdown plan?
I strongly believe in Financial Independence, Working On Own Terms. #FIWOOT.
So our semi-retirement income plans in our 50s could look like this but I will keep you posted!
- Work and earn part-time income.
- Live off dividends from taxable accounts.
- Make slow, methodical RRSP withdrawals.
…then our drawdown order could look like this:
“NRT” = Non-Registered (N) then RRSPs (R) then TFSAs (T).
What does that mean?
N – Regarding non-registered accounts
- We intend to work part-time in our 50s and “live off dividends” to some degree from this account. Some taxable dividends should pay for a few fixed costs: condo fees and/or property taxes every year.
R – Regarding RRSPs/RRIFs
- In our 50s and 60s, we’re going to do something unconventional – we’ll start withdrawing assets, slowly, from our RRSPs. This will help smooth out taxes over a period of decades given other assets we hold. Based on account values now, our RRSP assets should last until our early 70s.
T – Regarding TFSAs
- We don’t intend to touch our TFSA assets in any early retirement.
- We will let our TFSA assets compound over time.
- By our early 70s, with part-time work done, with taxable assets likely sold, and most of our RRSP/RRIF assets likely depleted as well, our plan is to live off income from mainly any government benefits (CPP and OAS) and TFSA income/withdrawals. The latter will be tax-free!
Q&A with Mark: What about your government benefits?
We’ll take Canada Pension Plan (CPP) and/or Old Age Security (OAS) at likely age 65 or later once those RRSP assets are nearly gone.
Q&A with Mark: What Canadian stocks do you own?
As part of my/our hybrid investing approach, we own a number of Canadian dividend paying stocks. I’ve essentially created our own Canadian dividend fund.
I own most of the stocks many of the big Canadian ETFs own. I have done so for well over a decade now.
I use low-cost ETF XIU to skim the index:
I/we like owning “TULF” stocks.
What are “TULF” stocks???
- “T” = Telecommunication companies.
- “U” = Utilities.
- “L” = Low-yielding dividend growth stocks with growth potential.
- “F” = Financials.
Examples in our portfolio:
- “T” for Telecommunications companies (Telus (T) and Bell Canada (BCE)).
- “U” for Utilities (Fortis (FTS), Emera (EMA)).
- “L” for Lower-Yielding companies (Canadian National Railway (CNR), Waste Connections (WCN)).
- “F” for Financials (Royal Bank (RY), TD Bank (TD)).
Basically, I buy companies that I believe people need.
- People love their internet and cell phones, so I own telcos.
- For the most part, people like electricity and they also want to heat and cook in their home(s), so I own utility companies and energy companies.
- We need to ship things around our country (so rail companies make sense) and we have to manage waste and recycling too.
- People get mortgages and borrow money for lots of reasons – so banking makes sense to own too.
I think you get the idea by now…!
Q&A with Mark: Do you own any U.S. stocks?
Yes, just a few since we prefer to index invest beyond Canadian stocks. Here are a few examples in our portfolio and why:
- Johnson & Johnson (JNJ) – people need healthcare.
- Procter & Gamble (PG) – people buy consumer products and goods.
- BlackRock (BLK) – people invest their money.
Q&A with Mark: What is your Asset Location?
Generally speaking, this is what I keep where but not advice nor suggestions for you and certainly not everything I own for privacy reasons. Just guidelines with rationales below:
- Non-Registered/Taxable = Canadian stocks.
- TFSAs = Canadian stocks and low-cost ETFs, like XAW.
- RRSPs and LIRA = mostly U.S. stocks, low-cost ETFs, like QQQ.
Non-Registered Accounts + TFSAs
I/we own Canadian dividend paying stocks inside our taxable accounts and inside our Tax Free Savings Accounts (TFSAs) since Canadian dividend paying stocks receive favourable tax treatment from our government – they are eligible for the Canadian dividend tax credit if held in a taxable account. There are also no foreign withholding taxes for Canadian stocks held within our TFSAs or RRSPs.
RRSPs and LIRA
Like I wrote above, we hold U.S. assets in some accounts. Unfortunately U.S. dividend paying stocks do not receive any favourable tax treatment from our Canadian government. So, I keep U.S. stocks inside an RRSP or LIRA (Locked-In Retirement Account) to avoid paying any withholding taxes (15%).
Some notes on that:
- 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).
If 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%.
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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