This blog is about saving and investing my way to a $1 million portfolio. We were more than half-way to this goal in 2017. Onwards and upwards as they say…and we’re getting closer.
The $1 M 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 income that comes from this blog.
Here are some articles that relate to our lofty goals and why:
A major part of our investment strategy to accomplish this $1 million goal is via dividend investing in some key accounts. Here is our chart as of December 2018:
We believe earning $30,000 per year in tax-free (thanks TFSA) and tax-efficient (taxable account) dividend income will cover most of our basic living expenses for as long as we live.
Here are some examples of what this $30,000 per year in dividend income (which should grow over time thanks to dividend increases alone) should cover in 2019 dollars for the rest of our lives:
- food/groceries, basic household supplies = $8,000 per year or $667/mo.
- condo utilities (heat, hydro, water, internet, cell phone bills) = $6,000 per year or $500/mo.
- condo property taxes = $6,000 per year or $500/mo.
- condo fees in Ottawa = $6,000 per year or $500/mo.
- 1 car expense (insurance ($50-100) + gas ($50-100) + car maintenance (flexible)) = $3,000 per year or $250/mo.
- healthcare costs (various).
$30,000 per year and more every year without touching the capital. I look forward to it!
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.
Can we live on just $30,000 in dividends per year? No.
I don’t think so. Our needs and wants will exceed $30,000 per year. Thankfully, we have government pensions and RRSPs assets to spend.
Our plan is to draw down our RRSPs in our early 50s, about $20,000 per year.
Pre-tax, $30,000 per in dividend income + $20,000 per year in RRSP withdrawals will give us $50,000 per year to live from.
Can we live on $50,000 per year? Very close.
Even after we realize our $30,000 per year in dividend income goal, while we draw down our RRSPs to the tune of $20,000 per year; we’ll still work. Why? We want to keep our bodies and minds active.
To provide for semi-retirement needs and wants, we figure we need part-time jobs that earn us about $10,000-$20,000 per year. Maybe that income could come from this blog, or another gig. I really don’t know. It does mean I won’t need to work as hard as I do today. To summarize now:
- $30,000 per year in dividend income will cover basic necessities for life (food/groceries + healthcare costs + condo utilities + condo property taxes + condo fees + any car (1) maintenance) for life.
- $20,000 per year withdrawn from our RRSPs will cover some additional needs (additional healthcare?) and some wants in semi-retirement until our workplace pensions kick in. Probably a bunch of travel.
- $10,000-$20,000 per year in part-time work should cover the rest!
Can we live on $70,000 per year? Absolutely!
As RRSP assets disappear throughout our 50s and 60s (we’ll be drawing them down) we’ll replace that income with our workplace pensions. We intend to take our workplace pensions in our 60s to avoid any early retirement withdrawal penalties.
As of 2019, my defined benefit workplace pension should payout just north of $30,000 per year at age 65, indexed for life. As of 2019, my wife’s pension should at least be half that amount.
So, starting in our 50s:
- $30,000 per year in dividend income (from non-reg. + TFSAs) to cover all basic necessities.
- $20,000 per year withdrawn from our RRSPs (x2) in our 50s and 60s to cover some additional needs and wants (additional healthcare?, international travel).
- $10,000-$20,000 per year (each) in part-time work.
= semi-retirement earning ~ $70,000 or so per year. We can and will absolutely live on that.
Lastly, we’ll consider taking government benefits like CPP and OAS payments at age 65 or later once our RRSPs are gone.
- 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. Here are some reasons why you should defer your CPP and OAS payments.
My Boring Dividend Investing Approach
- I buy Canadian and U.S. companies that pay dividends. I don’t own any company 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 and you should too.
- I use low-cost Exchange Traded Funds (ETFs) to invest in other countries from around the world to further diversify my investments.
That’s it. I told you it was simple. Buy, hold, add more over time. Rinse and repeat.
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!
- These are banks (examples: RY, TD, BNS, BMO, CM).
- These are insurance companies (examples: SLF, MFC, GWO).
- These are pipeline companies (examples: ENB, TRP, IPL).
- These are telecommunications companies (examples: BCE, T).
- These are energy companies (like SU).
- These are utilities (examples: FTS, EMA, AQN, CU, CPX, INE, BEP.UN).
Basically, I buy companies that people need. People need to bank, 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…
I also own a number of Real Estate Investment Trusts (REITs). Examples include REI.UN, HR.UN, CAR.UN, CHP.UN and a few more. I’ve basically unbundled REIT ETFs like ZRE, XRE and ZRE to own those companies directly. 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 companies.
- Reinvest dividends paid.
- Relax. Do nothing. Wait.
- Reinvest dividends (again) next month and quarter.
- Wait some more. Watch more income roll in.
- Rinse and repeat until wealthy.
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:
- Johnson & Johnson (JNJ)
- Pfizer (PFE)
- Procter & Gamble (PG)
- And a couple more.
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 up to 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.
What to invest where?
I do not/will not hold U.S. stocks in a Canadian non-registered account. Why?
Here is a summary of what I’ve learned:
- 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).
This is why I keep U.S. stocks inside my RRSP: no withholding taxes on U.S. dividends. This is not the case when you hold U.S. dividend stocks in a non-registered account. In a non-registered account you’ll pay:
- 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. 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; take advantage of the dividend tax credit. In Ontario, you can earn about $50,000 in dividend income tax-free provided you have no other income to report. Incredible really.
TFSAs: Canadian dividend paying stocks and Canadian REITs; no dividend tax credit but at least tax-free income.
RRSPs: U.S. dividend paying stocks and U.S.-listed ETFs; no withholding taxes, USD dividends and long-term capital appreciation via equity ETFs.
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