January 2021 Dividend Income Update
Welcome to my first dividend income update for 2021!
For those of you new to these posts on my site, for many years now, every month I discuss our approach to investing using Canadian dividend paying stocks.
However, this year, for 2021 – things will be a bit different.
More on that later in the post.
To recap though, here is our overall hybrid investing approach across some key accounts:
- Approach #1 – we own a number of stocks for income and growth across our portfolio. In fact, for these monthly updates that only focus on our taxable account and Tax Free Savings Accounts (TFSAs), we own 22 different Canadian stocks. We also have a new addition! More on that later like I mentioned…
- Approach #2 – we’re owning more units of low-cost U.S. Exchange Traded Funds (ETFs) inside our RRSPs over time. We believe in doing so because investing this way provides extra portfolio diversification beyond Canada’s borders. We’ve been on a journey for a few years now to own more U.S. ETF units inside our RRSPs in particular for such diversification, and we hope to buy more ETF units as 2021 rolls on.
In fact, here are the 3 ETFs we specifically want to focus across our portfolio here.
Hybrid investing explained
I’ve coined the term hybrid-investing to describe my investing approach over ten years ago now because I believe it accurately describes what I’m trying to achieve long term:
A balanced blend of individual stocks and low-cost equity ETFs – for passive, growing income and diversified long-term growth.
We’ve devised this investing approach because it means nothing should really change as we transition to semi-retirement in the coming years, to start considering drawing on our portfolio we’ve worked so hard to build, while working on our own terms.
Forget “FIRE” people, financial independence and working at what you enjoy is what really matters!
While we’ll have workplace pensions and some government benefits to look forward to it in the coming decades, we believe the ability to live off dividends (along with said work on our own terms) will absolutely provide us with the financial flexibility we need in semi-retirement, and desire.
My bucket approach for income and growth
For many, choosing a retirement income strategy is a difficult challenge.
There is really no consensus on how to draw down any portfolio.
For us, at least at this point in our investing careers, I think we’ve already figured part of that out in our current asset accumulation years.
We’ll employ a modified cash wedge / income bucket approach that looks something like this:
- Bucket 1 – keep about one years’ worth of living expenses in cash savings in case the market goes haywire as a modest emergency fund.
- Bucket 2 – keep about 50% of our portfolio invested in dividend-paying stocks from Canada and the U.S.
- We’ll use that income generated from the stocks to pay for many living expenses.
- Bucket 3 – keep about 50% of our portfolio invested in a couple of low-cost, diversified, equity ETFs.
- We’ll also use that income generated from the ETF assets to pay for many living expenses.
I have an updated cash wedge / income bucket table to share in future blogposts.
For now, you can read more about any cash wedge investing approach here.
How is this hybrid investing approach helping our dividend income?
By formulating this income generation strategy over the years, I’ve found it has created some essential focus and investing discipline over time as well. Simply put, having this investing approach in place has put our semi-retirement dreams that much closer.
You may recall we ended December 2020 with earning $20,892 in dividend income in some key investing accounts – taxable and TFSAs specifically.
Well, thanks new 2021 TFSA contributions and assets purchased inside the TFSA last month, our forward dividend income for the year should be closer to $22,500 by the end of 2021. You can see our green target estimate in the chart below.
As of this month, that forward income is already at $21,115.
To put that income more into perspective:
- Almost half of that annual income is tax-free. Love it! Yes, you read that correctly. We will not pay tax on that income when we decide to withdraw monies from our TFSAs.
- If we weren’t reinvesting many dividends paid (but of course we are today…) that income would cover our property taxes, condo fees and utility bills as key household expenses – including likely all inflationary costs for those things in the range of 2-3% per year, for life.
- $21,115 in forward dividend income per year has more than doubled in the last seven years. See the chart. The major investments we’ve made is maxing out TFSAs every year – that’s it. Compounding is now doing the rest of the work!
- $21,115 in annual income translates to earning roughly $2.41 per hour of every hour of every day (income/8,760 hours (24 hours x ~365 days)) even in my sleep.
It has been said some of the most successful approaches to investing are essentially boring. Proof in practice!
Changes to the TFSA going forward
In 2021, we’ve gone even more boring with our investing if that was possible!
While I remain a huge fan of Canadian dividend paying stocks inside my taxable account and within our TFSAs, I took a departure for 2021 TFSA investing.
I actually bought some ETF units. 400 units in fact – all iShares XAW.
I bought XAW because I eat my own cooking.
With so much of my/our TFSAs filled with Canadian stocks, I felt it finally made sense to diversify away from our borders and invest ex-Canada in one of the lowest-cost funds around.
XAW is a simple way to own U.S., international and emerging market stocks in a *tax-free way (inside the TFSA).
Also, because U.S. stocks nor U.S.-listed ETFs receive no special tax-free status inside the TFSA (there are *withholding taxes to pay as you can read about on this page here), I felt it made sense to become lazier for growth-oriented purposes inside this tax-free account with a Canadian-listed ETF that invests abroad.
(Note: *the real MER cost + withholding tax cost for Canadian-listed ETF XAW, that holds a mix of U.S. ETFs that invest in U.S. and international stocks is just under 0.60%).
While I have no intention of making any major stock moves within the TFSA, I do have the intention of adding more of this fund when 2022 TFSA contribution room comes around. Beyond the withholding tax, this ETF is just a simple way to invest in the world of stocks beyond Canadian borders.
So, for 2021 investing, things are a bit different but it’s really more of the same. We are sticking with our hybrid approach to investing to realize some of our dividend and distribution income goals.
We’re now about 70% “there” to realizing our multi-year investing dreams – with details about our actual holdings (and much more) on this dedicated Dividends page here.
Stay tuned for more monthly updates in 2021. I keep you updated each and every month!
As always, let me know your thoughts in a comment on the site. I read and try to reply to every one of them!
How are you investing inside your TFSA in 2021? How are you investing in general?
Further reading – how we got here:
My dedicated Dividends page.
My ETFs page about top funds to own, why and where to own them.