June 2020 Dividend Income Update

June 2020 Dividend Income Update

“Much of our savings in Canada literally goes to waste.  Keeping money in cash or bonds accomplishes little in the long term after tax and inflation.”

“I have certainly made investment mistakes.  Everybody makes mistakes and you don’t learn unless you make a few.”

“I believe that debt worldwide is so high that a sharp expansion of the money supply, which in time always causes inflation, is inevitable.”

“Taxation has never been fair, since government can only take from those who have money.”

“In the investment business you always have to look at the downside because that’s where your risk is.   Anybody can live with the upside!”

“Brokers make their money on commissions. So if an investor worked with a broker and bought Abbott Laboratories, the poor sap would make one commission in a lifetime, unless the client had new money to place.”

“Clearly, investors are operating in a jungle with some very vicious animals.”

Indeed we are Stephen! 

Gotta love those sage words of wisdom from a Canadian billionaire and business magnate. 

I read his book The Investment Zoo years ago and it’s one of a few dozen personal finance books I’ve actually kept on my shelf. I do so to remind me how I got started with dividend paying stocks and why I continue to hold them through some thick and currently thin times.

Vicious dividend cuts

In recent monthly posts, I’ve shared I’m not immune to dividend cuts in my Canadian stock portfolio. There have been dozens of dividend cuts in our Canadian market to date. Fortunately for me, there have only been three (3), but they do sting. Dividend cuts have reduced my annual dividend income by hundreds of dollars per year – cuts from H&R REIT (HR.UN), Inter Pipeline (IPL), and our major energy player Suncor (SU).

While these cuts challenge my thinking on these stocks, they don’t change my overall investing approach.

Key Reason #1: My investing timeline is years and decades into the future.

I buy and hold my stocks almost regardless of the price of today. Even with these cuts, many other stocks are doing just fine. In fact, most of my stocks can be DRIPped. I’m buying many shares at relatively speaking cheap prices.

If you aren’t already reinvesting your dividends – you should consider it.

“Risk to us is 1) the risk of permanent loss of capital, or 2) the risk of inadequate return.” – Charlie Munger

I included this quote because it means the complete loss of capital from your investments going south should matter FAR more than any short-term gyrations in your portfolio. This includes any dividend cuts that you might incur. Given these three stocks above combined make up less than 3% of my overall investment portfolio (thanks to a diversified portfolio) I’m not overly concerned about their short term prices. Things will return, eventually, to greener pastures. 

This is why I have and will likely always have an affinity to a basket of dividend paying stocks, to offset any small dividend cuts that can and do occur from time to time. This basket includes owning stocks from other sectors that offer low(er) volatility. You could argue these companies tend to be of higher quality in this COVID-19 environment that also pay consistent dividends over time.

While I will continue to hold IPL and SU for sure, HR.UN is a maybe.

I’m thankful I have these low-vol holdings in many other companies including some of those listed in BMO’s ZLB top-10 (ZLB = low volatility Canadian equity offering):

Image courtesy of BMO.

Key Reason #2: I index invest for growth.

While I love my dividend stocks (to take advantage of the wonders of compound interest by reinvesting my dividend income and continuing to build on those investments over time), I also invest in some low-cost U.S. ETFs for growth.

I figure this “hybrid” approach to investing (as I like to call it) offers me the best of both worlds:

• I earn dividend income, today, that I can reinvest to earn more income, AND 
• I participate in a passive, lazy, low-cost ETF strategy that delivers long-term growth.

Beyond the non-registered and TFSA updates I provide in these monthly posts, our Registered Retirement Saving Plans (RRSPs) include more U.S. assets over time. I will add more U.S. assets later next year when I have RRSP room again.

These are some of the best low-cost ETFs for your RRSP too. 

June 2020 Dividend Income Update

In our prolonged low-interest rate environment, I have every reason to believe prospective early retirees like myself or those already retired are going to earn next to nothing when it comes to the historical returns from fixed income. This is not to say you shouldn’t own some bonds or cash. 

This means investors are going to have to learn with more stocks. 

So, in owning more stocks than bonds and by reinvesting my dividends paid today, I will avoid any short-term speculation and rely on my growing stream of dividend income coupled with RRSP growth to pave my path to financial independence. A goal I might add that is about 68% accomplished as of this month:

Without any money added since January 2020, to put that passive income in perspective:

• That’s like earning $2.32 per hour of every hour of every day ($20,360/8,760 hours (24 hours x ~365 days)) even in my sleep.
• It’s the equivalent of earning $9.79 per hour assuming I work a 40-hour work week ($20,360/2,080 hours (40 hours x 52 weeks)). Then again, some of that income is 100% tax-free (thanks TFSA).

In more practical terms, it is our hope excluding our future workplace pensions OR any RRSP assets, we believe this income from our non-registered account and from within our TFSAs (when we decide to draw it down that is) might cover our condo fees, property taxes, any utility bills at least, each year – for life.

Stay tuned to my blog to find out where we are after July dividends are paid. We should be trending higher for the 2020 calendar year as more dividends are reinvested but that assumes no more dividend cuts occur! 

Further reading:

You can see some of my stock holdings here. Our long-term goal is to earn $30,000 per year from these accounts.

These are dozens of articles about low-cost ETF investing and how I invest here.

Thanks for reading,

Mark