My Dividends

Welcome to my Dividends page.

This blog is about saving and investing my way beyond a $1 million investment portfolio. We will use dividend paying stocks to help fund part our semi-retirement plan. 

Read on…!

Millennial Investing

 

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 and never have been. 

Owning stocks that pay more, less or no dividends at all may or may not be better for your long-term returns. 

Dividends are not free. Dividends don’t fall from the sky. You can of course make your own dividends. 

via GIPHY

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 dividends 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. It can be a strategic decision to pay a dividend (or not). 
  • 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:

Honest Math - Dividends

Source: Honestmath.com

A reminder 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. You will need to figure out that timing though. 

Ultimately total return matters. 

Dividend Slide

 

Q&A with Mark: Why do you love dividends so much?

Even though I know dividends are not free, a few reasons come to mind for me:

  1. There is optionality – I can reinvest the dividends and/or distributions as we wish or just take the cash. 
  2. 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. 
  3. “Living off dividends” can help reduce any income worries about when to sell shares (i.e., I can avoid selling shares during any market downturn of 10% or 20% or even 30%. You can of course make your own dividends = selling shares as you see fit.)
  4. Earning dividends is a great complement to my low-cost ETF investing approach that focuses on growth. You can read about my favourite, best, low-cost ETFs to ride market returns here.

Ultimately, I feel my “hybrid investing” approach captures the best of both worlds:

  • Dividend income, earned today, to spend or reinvest the money as I please.
  • Low-cost, global growth, beyond Canadian borders. 

Simple.

Your mileage may vary and that’s OK! 

 

Q&A with Mark: Do you have a dividend income goal?

It was earning $30,000 per year from taxable and TFSA accounts.

I share that goal, not to brag, but to demonstrate what is possible.

There are DIY investors I know earning three times that much from their portfolio…

Now that we’re into 2024, I’ve updated this table to share our base expenses (without major travel, capital expenses, entertainment, etc.) given we are mortgage free. 

Base expenses

Currently Monthly

Current Annual

Comments

Mortgage   
Food/groceries$800$9,600Varies month-to-month.
Dining/takeout$200$2,400We have increased this budget over time.
Shelter (home/condo maintenance/improvement expenses)$1,000$12,000Represents 1% home value per year, increasing by 3% inflation.
Home property taxes$500$6,000Ottawa is not cheap, increasing by inflation.
Home utilities + internet/TV/cell phones, subscriptions, etc.$500$6,000Utilities to increase by inflation. 
Transportation – x1 car (gas, maintenance, licensing)$150$1,800We are likely to buy a newer car, PHEV, in cash in 2024.
Home, Auto Insurance, including term life$250$3,000$300 per year term life ends in 2030; will self-insure without life insurance premiums after that. 
Subtotal$3,400$40,800 
Buffer/Misc.$600$7,200 
Total base expenses$4,000$48,000Without travel, capital expenses, entertainment, etc.

I figure we need at least another $500 per month for more buffer. 

That means, we need at least $4,500 per month x 12 months = $54,000 per year generated from our portfolio if we want to consider complete retirement.

Here is our updated chart including what 2024 might deliver:

December 2023 Dividend Income Update

 

Q&A with Mark: what is your semi-retirement / drawdown plan?

I strongly believe in Financial Independence, Working On Own Terms. #FIWOOT.

This is what we are hoping for:

  1. Work and earn part-time income in our 50s.
  2. Live off dividends from taxable accounts for decades. 
  3. Make slow, methodical RRSP withdrawals over time. 

This means our drawdown order looks like this: 

“NRT” = Non-Registered (N) then RRSPs (R) then TFSAs (T).

What does that mean?

N – Regarding non-registered accounts

  • Since we intend to work part-time sometime in our early to mid-50s, we’ll “live off dividends” to some degree from our taxable accounts. We will sell stocks over time too. 

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 during part-time work as needed. This will help smooth out taxes over a period of decades given other assets we hold. 

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 most of our RRSP/RRIF assets likely depleted, and our non-registered accounts winding down, our plan is to live off income from mainly any government benefits (CPP and OAS), my small workplace pension, and TFSA income/withdrawals. The latter will be tax-free!

 

Q&A with Mark: What about your government benefits?

We’re likely to take Old Age Security (OAS) at age 65 and Canada Pension Plan (CPP) at age 70.

Here are some reasons why you should consider deferring CPP and OAS payments.  

 

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.

How I built my dividend portfolio

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 and you might want to consider the same. I figure if the largest 60 stocks in Canada are not making money, well, few companies are. 🙂 

XIU December 31, 2020

From XIU 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.

Here are some examples and why:

  • “T” for Telecommunications companies (Telus (T) and Bell Canada (BCE)).
  • “U” for Utilities (Fortis (FTS), Capital Power (CPX)). 
  • “L” for Lower-Yielding companies (Canadian National Railway (CNR), Waste Connections (WCN)).
  • “F” for Financials (Royal Bank (RY), CIBC (CM)). 

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. We also need to manage waste and recycling too, so those are good lower-yielding and higher-growth stocks to own.
  • And, finally, people get mortgages and borrow money for lots of reasons – so financial stocks make 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 now.

In recent years I prefer to index invest beyond Canadian stocks for growth.

You can see what boring ETFs I/we own and why on that dedicated page. 

That said, I continue to own a handful of U.S. stocks.

Here are some examples and why:  

  • BlackRock (BLK) – people invest their money. 
  • Southern Company (SO) – people like electricity in the U.S. as well. 🙂 

 

Q&A with Mark: What is your Asset Location?

Generally speaking, this is what I keep where but this is not advice. Here are some guidelines with rationales below:

  • Non-Registered/Taxable = mostly Canadian stocks.
  • TFSAs = mostly 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 + 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%.

If you want to learn how to switch Canadian $$$ to U.S. $$$ for less – learn about Norbert’s Gambit here.

 

Other Asset Location Articles!

Check out this article about taxable investing and what to hold where.

You can get U.S. income from British ADRs tax-free using this method.

Here is how to get U.S. dollars from Canadian dividend paying stocks.

 

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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