June 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 my approach to investing using mostly Canadian dividend paying stocks and how reinvesting the dividends paid from these Canadian holdings are helping us reach financial freedom – one month at a time.
A reminder from last month’s update the strikeout above was done on purpose. I no longer hold any Canadian ETFs in my portfolio. Why? Essentially I’ve created my own Canadian dividend ETF that has no ongoing or pricey money management fees. In owning all big Canadian banks, major pipelines, biggest telecommunication companies, largest utilities and energy conglomerates, and some Real Estate Investment Trusts (REITs) I’ve basically created my own Canadian dividend ETF.
That brings me to this.
Over the years, many readers and emails to the My Own Advisor inbox have asked about the specific stocks in our portfolio. Today’s post will finally highlight more details of that.
Banks and Lifecos
We own all big-six (6) Canadian banks across various accounts (non-registered, Tax Free Savings Accounts (TFSAs), and Registered Retirement Savings Plans (RRSPs)).
We’ve owned TD, RY, BNS, BMO, CM, and NA for many years.
I anticipate these companies will pay dividends (and increase their dividends) for decades to come.
We also own the top-3 commonly life insurance companies held by institutional investors: SLF, MFC, and GWO.
We own a few pipeline companies in the energy sector.
As long as these companies continue to reward us via dividends we’ll continue own them.
In fact, Enbridge (ENB) was actually one of my first dividend stocks. It remains in our portfolio today.
We also own TRP stock.
Heard of “Robellus”? That’s the moniker assigned to the biggest telecommunications companies in Canada: Rogers (RCI.B), Bell (BCE), and Telus (T).
We own all these companies since I figure if you can’t beat them, you might as well join them.
Instead of holding any utility Exchange Traded Funds (ETFs) like XUT (that charge us fees) we decided many years ago to hold the top-stocks in such funds and avoid any ongoing fees.
For many years we’ve been adding to our positions in FTS, EMA, CU, and AQN.
By investing in these companies we’ve experienced both solid dividend growth and capital appreciation. Fortis (FTS), Emera (EMA), and Canadian Utilities (CU) in particular tend to increase their dividends every year.
Unless you’ve been living under a rock for the past few years you should know by now that the energy sector can be very cyclical and rather volatile. History has also proven this – there are many peaks and valleys when it comes to pure energy play stocks. The oil and gas industry in particular seems to have a crisis every decade or so. At the time of this post oil prices remain very depressed. Despite that however, I remain invested in SU. I think Suncor (SU) will thrive once again and if I’m remotely correct there will be a sizeable capital gain to deal with in the future.
One needs to be careful with Real Estate Investment Trusts (REITs). They can be somewhat cyclical as well. Then again, if you’re looking for income I believe this beats being a landlord.
EITs are not generally required to pay Canadian income tax if they distribute all of their net income for tax purposes on an annual basis, so that tax is passed on to you and me, the investor. For this reason, I suggest owning REITs in registered accounts such as RRSPs, RRIFs, RESPs, and TFSAs.
We a few commonly known (and commonly held) REITs across many accounts, examples include REI.UN, CAR.UN and others.
Now, before you run out and copycat this portfolio some words of caution.
- These dividend income updates focus on our non-registered account and our TFSAs only. There is a bias to owning Canadian dividend stocks in these accounts for a few reasons. However, I need to remind you we also have RRSPs full of U.S.-listed content. My RRSP is maxed out with mostly U.S. and international content. We do this for diversification. I would strongly suggest any investor also invest outside of Canada’s borders for diversification. We use predominantly ETFs in our RRSPs for this diversification although we hold some U.S. stocks for dividend income as well. Companies in the healthcare and information technology sectors are there. As are huge, multinational companies in the consumer discretionary sector where Canada has been historically weak.
- While we are striving to earn $30,000 per year from our Canadian dividend paying stocks for an early retirement – with the intention to “live off dividends” – I know we will eventually spend our capital. Therefore, total return (not just dividends) is important consideration for all investors in my opinion. Especially those investors who are in their asset accumulation years and not necessary looking at capital preservation.
- This strategy is not without some risk. As you have seen, we own financials, energy, utilities and other companies from various Canadian sectors but there are no healthcare stocks nor information technology stocks to speak of, from a Canadian content, in the portfolio. This means, potentially, this DIY Canadian dividend ETF might be missing out on returns from companies like Extendicare or Shopify if they do well in the future (just as examples). Will I fail to beat the index? Time will tell however I’m confident we have a collection of dividend payers and dividend growers in the portfolio that will serve us well long-term with minimal oversight. (So far, returns prove this. Our returns are in line with the TSX and slightly ahead depending upon the time frame you look at.)
So there you have it. A deeper look inside the Canadian content of our portfolio. Thanks to Canadian companies that continue to pay us every month and quarter, and sometimes increase those dividend payments each year, our dividend income is growing towards one of our financial goals.
As of end of June 2017 we’re on pace to earn close to $14,750 this calendar year from dividend income in selected accounts. We don’t dare touch this money because it’s earmarked for our financial future. It’s now growing at roughly $50 per month thanks to dividends reinvested and dividend raises throughout the year – without any new capital invested. (We will invest new capital in January 2018 – we intend to max out our TFSAs then.)
Dividend investing is not without risks. Yet having a financial plan that includes dividend investing as one part of a much broader approach has been a rewarding journey. Dividend investing provides cold hard cash into our bank account. This is money we will eventually use. I believe this approach remains a great complement to assets held inside our RRSPs; maxing out our RRSPs with international content, some small workplace pensions to draw from, and in the next five years a fully paid off home.
What’s your take on our approach? Got questions about this post or these updates in general? Fire away. Thanks for reading and sharing.