Welcome to my latest dividend income update. For those of you new to these posts on my site, every month I discuss my approach to investing using Canadian dividend paying stocks and some low-cost Exchange Traded Funds (ETFs) and how reinvesting the dividends and distributions paid from these investments are helping us reach financial freedom.
What’s to like about dividends?
First, dividends provide regular cash flow and secondly that cash can be reinvested. We got paid even though the TSX and Dow both finished last week down almost 300 points. At the time of this post both markets had triple-digit losses. From a capital appreciation perspective, it was a paper loss, our investments are now worth less than they were earlier. On the other hand, the cash flow is up this week, and this month thanks to money being paid and money being reinvested commission-free to buy more shares that will pay more dividends next month and quarter. Another plus? Some of the companies we own raised their dividends recently – it’s always a good week when you get a raise without doing anything.
Third, dividends from Canadian stocks if held in non-registered accounts are taxed favourably, at much lower tax rates than interest income. Worse case your Canadian dividends (and distributions) can be tax-deferred using a Registered Retirement Savings Account (RRSP) or better still in my opinion, earned tax-free using a Tax Free Savings Account (TFSA).
Fourth from a stability perspective, dividends are a sign of a company’s financial health. If companies can raise their dividend (like some of them did in February) then over time this means they have the profits to do so. *You can’t fake dividend payments to shareholders for long. Sure, companies can reward shareholders other ways, capital appreciation is a big one but the trick for the average investor like me is to identify what companies will appreciate and when. I don’t have time to do significant amounts of stock research – I have better things to do with my time. Established dividend paying stocks, companies that have paid dividends for decades and generations take some of the guesswork out of long-term investing. *This is a good time to remind you that nothing is guaranteed when it comes to investing, including dividends, however I’m convinced owning a couple dozen Canadian dividend paying stocks across multiple sectors is a good plan for retirement cash flow. Then I index invest everything else. The proof is in these reports. Thanks to saving, investing and reinvesting practices we’ve grown our tax-advantaged and tax-free retirement cash flow from around $3,300 in 2009 to just over $10,000 in 2015. I firmly believe this is money we’ll never have to work for again. Like I mentioned last month, realizing this milestone has put us about 1/3 of the way towards our passive income retirement goal where my hope is we can leave the workforce when that goal is reached. Come back next month if not sooner to see how we’re working towards that.