July 2020 Dividend Income Update
I am a big fan of keeping it simple when it comes to investing.
I recall a quote attributed to famous investors Warren Buffett and Peter Lynch went something like this:
If you’re going to invest in a company, pick one that any idiot could run – because someday an idiot will probably run it.
Funny comment. But there is some truth here. I mean, with all the wealth that Buffett has, certainly he can hire and fire any portfolio manager and CEO he wants.
The rest of us aren’t so lucky.
So, if you’re going to invest in stocks for the long-run, my thesis is to generally gravitate to owning established companies that have a long history of growing earnings, surviving many market calamities, and ideally, that pay a sustainable and growing dividend.
My plan and my investment approach
Since the 2008-2009 Great Financial Recession, I’ve been a hybrid investor.
- I’ve owned primarily Canadian dividend paying stocks inside my/our Tax Free Savings Accounts (TFSAs) for growing dividend income; I also own such stocks in my taxable account,
- We own (increasingly for the former) a mix of low-cost U.S. Exchange Traded Funds (ETFs), some Canadian ETFs, some Canadian stocks, and some U.S. stocks inside our Registered Retirement Savings Plans (RRSPs).
You can find some taxable investing considerations on this page as well.
What does this have to do with simplicity again?
In a word: oligopoly.
One of the major reasons why I invest the way I do when it comes to our Canadian market (since 2008-2009) is because of that oligopoly: “few sellers”. In Canada, we have a few major industries that dominate our economy by a few major companies in those sectors. Generally, oligopolies have high barriers to entry. For example, it would be very expensive to build a new railway network to anything remotely comparable to what Canadian National Railway (CNR) has done:
I figure people will always want some products shipped by rail – so I invest in those companies. People want to borrow lots of money to buy homes and condos in expensive Canadian cities – so they need a bank to borrow from. I invest in those companies. People love their air conditioning in the hot, muggy summer and enjoy staying warm in the cold, Canadian winter, so I own companies that deliver those services as well – energy and utility companies. You get the idea.
I try and buy Canadian companies that people need consistent products and services from to live their modern lives. Hopefully no idiot will ever run these companies! 🙂
July 2020 Dividend Income Update
While I did write about some vicious dividend cuts in my Canadian portfolio, there are bright spots this year:
- Algonquin Power (AQN) raised their dividend in May during the start of this COVID-19 pandemic, and
- Capital Power (CPX) recently raised their dividend (last week) by >6%.
Although these raises have not fully offset the losses incurred with my dividend income this calendar year, they have buffered it. A good reminder when it comes to stock investing to take both the ups and downs…investing is a long term commitment and endeavour.
As of end of July 2020, here is where we stand:
Some interpretations to glean from the chart:
- We are ~68% towards realizing our semi-retirement goal. You can read more about our dividend income goal here.
- We continue to trend higher following some nasty dividend cuts – which is good. A major reason for that higher trend (beyond dividend increases) is thanks to dividends being reinvested. This means money that makes money, can make more money over time. Compounding in action. You can read more about DRIPs with your discount brokerage or stock transfer agent here.
Without any new capital invested since January 2020, to put that passive income in perspective:
- That’s earning $2.33 per hour of every hour of every day ($20,425/8,760 hours (24 hours x ~365 days)) even in my sleep.
- It’s the equivalent of earning $9.82 per hour assuming I work a 40-hour work week ($20,425/2,080 hours (40 hours x 52 weeks)). That’s a $0.03 per hour raise in the last 4 weeks.
When to spend dividend income???
A number of readers have emailed me this summer to discuss various semi-retirement or retirement income sources, including dividend income, and have asked me what my draw down strategy might be in semi-retirement.
I suspect they are asking because they have similar future plans or are striving to execute on those plans right now…
You know, I’ve actually given that a TON of thought. Here is my initial thinking right now (even though I’m still a few years away from executing on this plan myself):
- 50s – start drawing down our RRSPs/RRIFs + “live off dividends” in taxable account
- In our 50s, while working part-time, we’ll make strategic withdrawals from our RRSPs. With some part-time work, these RRSP withdrawals should be minimal (i.e., likely about 4-5% of RRSP portfolio value) as we transition from full-time work to part-time work. We expect to make this transition as soon as our mortgage debt is gone. Part-time work in our 50s is expected to cover some semi-retirement “fun stuff” like travel. RRSP withdrawals will need to cover basic living expenses in a debt-free condo.
- By withdrawing assets from our RRSPs, slowly, it will reduce this deferred tax liability.
- 60s – continue to deplete RRSP assets + take workplace pensions + continue to spend non-registered dividends
- In our 60s, maybe working part-time still (?) we’ll continue to deplete our RRSP assets. We’ll also draw down non-registered dividend income at this time.
- Likely by our early or mid-60s, our small workplace pensions will kick in. There is also a desire to take our CPP and/or OAS around age 65. In fact, there is the potential for us to delay our CPP until age 70. I hope to have more posts on this, in the future.
After age 70, I could see us living off our small pension incomes and government benefits (CPP and OAS). The dividend income highlighted in these posts would be used for any “extras” in life and support long-term health care needs years down the road. I feel by contributing to our TFSAs consistently in the coming years and/or keeping any TFSA withdrawals until “near the end”, that income is both tax-free and can be easily managed in any estate plan.
Dividend income provides optionality
One of the great things about being a hybrid investor, and using dividend income as part of my plan, I feel is the optionality that comes with dividends.
The more and more I consider our semi-retirement plan, I more I’m convinced this optionality will provide tremendous financial flexibility.
When you consider taxation, inflation, longevity risk, portfolio risk, changing spending needs and much more – there is far from any one-size-fits-all approach to draw down a portfolio. I intend to use some form of Variable Percentage Withdrawal (VPW) for my draw down plan.
I think it’s a solid one for you to consider.
Stay tuned to my blog to find out where we are after August dividends are paid in another month. In the meantime, I’ll have more investing and saving articles for you to enjoy and interact with me on.
As always, Happy Investing!