July 2017 Dividend Income Update
Welcome to my latest dividend income update.
For those of you new to these posts on my site, every month I discuss our approach to investing using Canadian dividend paying stocks. We believe buying and holding a number of Canadian dividend paying stocks in our tax-free (thanks TFSA) and non-registered accounts will, over time, provide some steady monthly income for future wants and needs in retirement.
As done in previous dividend income updates I’m going to answer a few reader questions about my investing approach – which I’m happy to answer as part of these updates.
Reader Question: Is your $30,000 in dividend income still a realistic goal?
Absolutely.
To help realize this goal we strive to max out contributions to our Tax Free Savings Accounts (TFSAs) every year. (You should consider that or strive for that as well – just a suggestion.) Maxing out our TFSAs is a huge enabler to increasing our passive income. If we are successful this year, that’s $11,000 invested in early 2018. Give or take that amount will likely yield about (another) $440 or so in dividend income per year – moving us closer towards our big hairy audacious goal here. If we rinse and repeat this process for many years to come I suspect through TFSA contributions alone we’ll be much closer to this income goal.
Beyond contributions and new investment purchases, I believe there are dividend increases that should occur in our financial future. Take Enbridge for example. Although Enbridge was a bit late with their dividend increase from 2016, early in 2017 they did not disappoint shareholders – with a 10% increase. Many other companies we own also increased their dividends this year – there are likely more to come before the end of this year.
We also reinvest dividends paid. More dividends paid buy more company shares. More company shares pay more dividends. You get the idea!
So, with contributions mainly to our TFSAs (and potentially some contributions and/or dividend increases in our non-registered account) coupled with dividend increases over time that should help us realize this income-oriented goal – one of our key long-term financial goals.
Reader Question: You own a non-registered account? Why? Shouldn’t you maximize contributions to your registered accounts first?
Great and very important question!
Yes, I hold a non-registered account and I only hold Canadian stocks inside this account. I’ve had this account for many years and thanks to dividend increases and price appreciation with the assets inside it, this account has been growing, which is nice. That said, a growing non-registered account while I am working full time has some tax issues associated with it – namely capital gains to deal with. I don’t want to sell assets in this account now since I’ll have to deal with those capital gains. I’ll do that at a later point in time. This non-registered account exists since my TFSA is maxed out (of contribution room) and so is my RRSP less some minor room in 2017. My wife has some RRSP contribution room left – that account should be maxed out within another year or so.
To your other question, shouldn’t you maximize contributions to your registered accounts first?
Yes. I highly recommend that to any investor – maximize all registered accounts first and then consider non-registered investing and/or paying down debt. Paying yourself first using the TFSA or RRSP is great – forget the debate on those accounts but you can always read about that here. Of course the latter, paying down debt, is a guaranteed rate of return. Doing so on your mortgage for example will likely save you thousands in borrowing costs on any journey to own your home from your mortgage lender.
Wrapping up, thanks for your questions. And thanks to Canadian companies that reward shareholders like us, whereby we can reinvest the dividends paid or buy more companies to move our future income higher, we’re on pace to earn over $14,800 this calendar year. Putting that income another way, that’s $1,234 per month in tax-efficient and tax-free income for life. We can’t spend this money now, it’s for our future, and slowly growing for that financial future.
On that note I have lots to think about with my wife in the coming years – how to better manage our investment portfolio. We do see evidence that buying and holding a broad basket of Canadian dividend paying stocks for income – is working as part of a much broader financial plan. As our financial plan evolves, I will keep you updated.
What’s your take on our dividend income journey? How do you invest? What do you do differently that we do? Share and comment away.
Congrats on $15K of dividend income. So Sweeeeeeeeeet!
I changed my investing strategy to GARP investing from dividend growth investing but I am very glad that you are killing it with the strategy!
Cheers!
BSR
Nice work on the dividend income progress Mark. Congrats to others who have accomplished their retirement goal and good luck to those working dilligently towards it.
I think some good points have been made to carefully consider, caluculate and plan which accounts you’re saving in over the years. Also consider a spousal RRSP if appropriate and applicable. Income splitting as currently availlable for registered pensions is a good thing and it will be even better at age 65 when RRIF income is also applicable. I’m another person drawing down my RRSP to live, to recontribute funds to TFSAs and to average taxes over time before other taxable income benefits are likely added – CPP & OAS in 7 or more years.
Fortunately our plan has worked out for us to reach retirement and are now happily into our 6th (wife) and 4th (me) years. Although I would have been very pleased to have the TFSA a couple of decades earlier to help keep taxes even lower now. You can’t have everything though and it’s all good!
I certainly intend to income split in another 20+ years when I can, if they don’t change the rules.
As for RRSP income, sure, it will occur but I don’t count it as part of these updates for a few reasons: 1) tax rate on RRSP withdrawals is largely unknown at this time (although I suppose I could guess); 2) I have a modest amount of US assets inside my RRSP so I would need to show USD <> CDN equivalency (I’m lazy); and 3) well, I haven’t historically included it 🙂
I fully expect to convert some RRSP assets to a RRIF before age 65. Just how much, not sure. I could foresee a time whereby if I have enough non-reg. assets and pension income (?) I won’t have any RRSP to convert by age 65 let alone age 71 when I’m forced to.
Congrats on retirement thus far RBull.
Thanks Mark.
I also forgot to mention in addition to RRSP withdrawals this year I also converted LIRA to a LIF and have begun minimum withdrawals.
You’ll be able to income split with your registered work pension (if beneficial) as soon as it starts (no age restrictions). I’m assuming that’s less than 20+ years from now. Rules changes….who knows…. PC’s brought in retired couples income splitting but with current/forecasted govt. spending it seems inevitable fed. tax revenues will need to rise=change. The unfair part of income splitting for retired folks younger than 65 seems that is it is available to anyone with a registered DB pension (note- large number of these are politicians and government’s own unionized employees) but not available for those who have to rely on their own RRSP withdrawals (no pension), and/or having a DC pension even if converted to LIF or RRIF. Perhaps this is a flaw with the original act and something the libs could walk their talk with in the interest of “fairness to the middle class”.
I think you lost me on the last paragraph. You’re planning to convert some RRSP’s to a RRIF before 65. However, I’m not following how a large non reg asset income and large pension income means you won’t have any RRSP left to convert at 65 or at 71. I must be missing something.
Sorry, I probably wasn’t clear.
My intent is to convert RRSP to RRIF before age 71, since I will be drawing some pension income after 55. I hope to avoid any OAS clawback situation by reducing my RRSP assets before age 65 (when I will start taking OAS) and in doing so, I hope to transfer any RRSP assets I don’t use into tax-efficient dividend income in my non-reg. account.
Again, I haven’t done the math on all this yet because I’m 20+ years away for needing to do this however my plan is to smooth out taxes over time and given I will have a small pension in my future, I’m thinking it makes little sense to wait until age 71 to convert it to a RRIF. I could be wrong of course!
Ok got it.
Are you not planning to top up TFSA from registered first (most tax efficient), before adding to your un registered (less tax efficient), particularly in light of “other income” (like work pension, govt pensions later on), gross up and future cap. gains. We certainly are and will. I’m thinking TFSA’s continue to be a priority for us for another 10-15 years (or as long as we’re able and its reasonable to do so) to knock down the size of registered accts while in our 50’s & 60’s, take some tax hit now (possibly at lower rates than in future??), to grow this tax free as the last accts to tap, along with anything left from RRIFs.
At current levels OAS clawback probably won’t be a factor for us. 142+K HHI is a signficant starting point with income splitting and would be an okay tax problem to have. However I think “welfare for seniors” may need to be “adjusted” likely with lower thresholds so wouldn’t have as much benefit if change occurs. Peronally I’d rather have a simpler tax system, no OAS at all, somewhat beefed up GIS and lower taxes overall to pay than inefficient government programs and administration.
I am re: I will top up TFSAs always to the extent possible, then non-reg.
I’m also thinking TFSAs are a huge priority until our 50s and 60s. Then I will need to figure out along with other accounts, how to draw those down eventually.
If I work until age 65 (I don’t intend to) then OAS will be an issue for me, for sure.
I’m all for a more simplified tax system including reducing government benefits for wealthy seniors but nobody for government is reading this blog and beyond that, governments never think long-term, only 4 years out.
Hey Mark (and Sarah)
I’m 64 and have been retired for just over 4 years. My wife was stay at home but has a significant spousal RRSP. Between the two of us, we have been withdrawing ~$110k/yr from our RRSPs. Some of it is cash for living expenses/building a bigger cash wedge/a bit of early inheritance for our 2 kids, some to TFSAs, and some to our non-registered accounts. Next year when I turn 65, I’ll be converting my entire RRSP to a RRIF and we will cut back our combined registered withdrawals to ~$85k. Since my registered account will be a RRIF, $2k of it will be for the pension tax credit and I can then use the pension income splitting to optimize our taxes.
In hindsight, I’m more than fine with the RRSP contributions generally but just wish I would have stopped contributing a few years earlier and put it into a non-reg account instead.
Everyone’s situation is different but our goal is to avoid any OAS clawbacks and to try and minimize that final tax bill for the estate. (and our total lifetime tax bill)
Ciao
Don
Impressive, able to withdraw ~$110k/yr from your RRSPs. I think you’re quite smart to start your RRIF at 65, pension split before the rules change since I think they might eventually – let most government financial policies 🙂
Well done Don and to date, I don’t regret maxing out my TFSA and RRSP. I feel it will give us financial options in our 50s and 60s. Sure, I don’t have a BMW in the yard now but maxing out those accounts might ensure I do have one if I want one eventually.
Cheers,
Mark
My priority is to max out my TFSA. We’re also opening a second TFSA for my wife and will try our best to max it out.
Well done on the TFSA. I think it’s the ultimate retirement account. Keep up the good work to max out the other one (wife’s).
“withdrawing about $20K or so per year from our RRSPs in our 50s”
This is what I’m doing now. Depending on farm income I pull out between 15-20 and combine that with income splitting to keep us both in the lowest federal tax bracket. I think we will bite the bullet and start pulling out a bit more and encroach slightly into the 20.5% bracket. Not that we need the $$ but I’m thinking I might as well do some energy renos on the houses now. I’m sure the government could use the money now. 🙂
No doubt the government could use the money but again, like other readers, I think you’re smart to withdraw from your RRSP earlier than you’re forced to in order to smooth out taxes.
Dear Mark,
Over the years, I have maxed out my RRSPs and now find myself in a bit of a (great!?) situation.
I earn enough dividends to pay our expenses with minimal tax implications. My problem is that if I withdraw form my RRSP it is pretty much taxed at the rate that it went in and that assumes no capital gains (then it’s definitely higher). I’ve been slowly taking money out (prior to being FI) but have since stopped. Assuming my dividend income will continue to grow, I’ll have quite the tax implication when I have to withdraw from my RRSP. Especially because my husband is significantly older than me and so I would also take any of his leftover RRSP money when he dies (assuming he dies before me). Note that he is currently in the process of retiring so we are drawing his RRSP money down.
Having said that, are you concerned at all about the fact that you will have such a “high” dividend income (especially with the gross up) and when you have to take money out of your RRSP, you’ll pay even more taxes (then you saved by putting them in)?
I don’t regret putting money into my RRSP because it was the catalyst to starting a good savings habit, and having too much money isn’t a bad thing, however, if I knew then what I know now (about my lifestyle and the partner I chose), I would have just left my money in a non-registered account.
Besos Sarah.
Having a maxed out RRSP is a great problem to have Sarah. 🙂
I think it makes good sense to draw RRSP monies down before you have to, i.e., before age 71 when you are forced to convert it to a RRIF for example. This can ensure you get the maximum government benefits (namely OAS) without getting clawed back – although every investor’s situation is different…
To your question – concerns about “high” dividend income? Not really. Our pensions will be modest and with penalties starting at age 55 (>11 years out) so that income won’t be very much. We’ll tap our RRSPs before TFSAs so that taxable income won’t be very much. I could foresee us withdrawing about $20K or so per year from our RRSPs in our 50s, so it’s not a huge withdrawal. Like you, I don’t regret putting money into my RRSP now because it was a great form of forced savings. Assuming I have my health in retirement, then a “money problem” is a great problem to have in my 50s and 60s and beyond.
I hope that helps clarify – cheers!
Mark
@Sarah de Diego
If your RRSP grew tax free at the rate it was supposed to, you should have a great nest egg that you should be ok with paying the taxes. The tax you saved when you put the money in, if invested, would have compounded the growth.
It’s how RRSP work, you know you will pay taxes but growing the account tax free is expected to accelerate your portfolio, especially if you invest the difference.
Mark – your thoughts on CDN REIT’s during what now seems to be Bank of Canada regular interest rate increases, at this time HR and REI are at very low PE’s – and wondered if to jump in or stay back during this rate increase period of time?
A bit torn John. I currently invest in a number of REITs for diversification (and likely always will) but I certainly see both interest rates and some speculation that retail REITs in particular are facing many headwinds (i.e., online shopping).
Personally I’m DRIPping those REITs inside my TFSA and will continue to do so, so in effect, I’m buying. I figure when people are fearful of REITs it’s a great time to buy but I’m also not backing up the truck to invest in them heavily since I try and keep those REITs between 10-15% of my total portfolio value.
Have you been investing in REITs and if so, for how long?
Cheers,
Mark
i’ve doubled my money in REI and down very very slightly in HR(less than 3%) – REI hitting $30 earlier this year i felt was an overshoot – but it looks to be trying to settle where it is currently… If i need this money in two years, towards buying a house – i may think soon to sell if we get a bounce in these Reit’s – thanx for your feedback Mark, and love your weekly columns – wish the redblacks could do something better to cap off their tight losses this year 🙁
I own a few hundred shares of REI.UN and HR.UN with no intention of selling them.
I wish the REDBLACKS would win one as well. I’ll be at the game tomorrow night.
Thanks for the kind words about the site.
Mark
In terms of investments, I take pretty much the same approach as you when it comes to maximizing our registered accounts (RRSP, RESP, and TFSA). My main motivation for maximizing these accounts first is the free money that I get in terms of tax refunds, government grants and tax-free growth of these accounts.
I am also a huge fan of diversifying my assets and income sources. I believe that real estate another great class of asset to generate more passive income. With that being said, not everyone wants to deal with tenants and property management.
Keep on hacking away and we will eventually reach our passive income goals. It’ll be a great feeling to just get a cheque every month without having to work :).
I think you’re smart in focusing on your registered accounts, RESPs included for your kids I presume.
We used to be landlords but gave up (maybe too soon?) on that after a bad experience that got our insurance company involved.
At the end of the day, to keep plugging along with small goals, each week; each month is the best way to realize some very big goals. All the best.