March 2019 Dividend Income Update
Here are some of my favourite lessons learned from my years of investing:
- With investing, you often get what you don’t pay for – fees matter. Please consider ditching your expensive mutual funds already if you haven’t already done so!
- Keep your investing fees as low as possible for as long as possible.
- Diversify your investments across companies, countries and continents to reduce equity risk versus owning just a few stocks that could sink your portfolio.
- Stay invested for decades if you can – regardless of what the stock market does or doesn’t do.
- Rinse and repeat until wealthy.
I’ve been following these principles with my dividend focused portfolio for almost 10 years now – and the results are really starting to show.
This was my income update at the end of December 2018 – it’s great to see this income progress over the years:
My dividend income is now much higher thanks to those little bullets above. More updates to share in a bit…
Investing may be simple but not easy
While the basics of investing are easy to grasp, arguably simple to understand, our bad behaviour and various decisions often get in the way. Meaning, investing can seem simple but it’s certainly not easy.
Before I share our dividend income update from our non-registered account and TFSAs, like I do every month here, I thought I would answer a few reader questions…so here they are with some adjustments and paraphrasing!
What do you do with your unregistered funds. Anything that pays dividends (even low dividend payers like VOO) the taxes can be of some size over time…
Also….for money needed in 2 years bonds in an unregistered account can have a negative return after taxes and inflation, same goes for a HISA.
So, I’ve found these ETFs:
Just curious what your thoughts are!
First of all, thank you for sharing your wisdom and financial journey. I love reading your blog and I learn so much from it!
I was wondering if you could give me some advice on where to put my money after maxing out my RRSP and TFSA contributions. I saw on your website that you put it in Canadian dividend paying stocks. How about ETFs?
I’ve also heard about Horizons HBAL as a tax-efficient fund. There are so many options out there, so frankly, I’m getting quite confused.
I’m worried that when I start investing our extra funds in a non-registered account, it will be a disaster come tax time. Would welcome any insight you have on this!
Great questions and thanks for being fans!
OK, so, what you’ve found are Horizon ETFs (the HSX, HBB, HCON, HBAL). Horizon provides various low-cost funds to own – a good consideration for many investors. In more detail:
- HSX is a S&P 500 Index ETF.
- HBB is a Canadian Bond Index ETF.
- HCON is one of Horizon’s all-in-one funds; for more conservative investors looking for a total return approach.
- HBAL is another all-in-one fund; for a more balanced (70% equity/30% fixed income) total return approach.
I don’t invest in any of these Horizon ETFs myself, I prefer to own Canadian dividend paying stocks inside my non-registered account and inside our Tax Free Savings Accounts (TFSAs) for passive income and growth – you can see some of those holdings here – but I know such funds are some great low-cost alternatives compared to many pricey mutual fund products I’ve eluded to above!
The tax-efficiencies you refer to in some Horizon ETFs come from the use of swap-based agreements to deliver returns. What the heck does that mean?
In a nutshell, the fund uses an agreement with another institution (National Bank I recall) to drive growth. This way, instead of being taxed on the distributions paid out by the Horizon’s ETF, as part of taxable account investing, those gains are harvested/compounded – so you only (in theory when your retirement income is lower) pay capital gains when you sell ETF units.
This swapping of current ETF distributions for long-term capital gains can be very attractive since if folks have maxed out tax-sheltered TFSAs and RRSPs, and they have money to invest in a taxable account, the swap-based ETFs that defer these gains can be an efficient – capital gains are an efficient form of taxation – far more efficient than taxation from employment income, interest, other!
The main drawback of this approach, from what I can see, is if you want money for retirement (versus relying on dividend or ETF distribution income) you’ll need to sell ETF units periodically (a cost) potentially at a time when you don’t want to (market lows?) AND pay any gains incurred come tax time (another cost). Be mindful that while capital gains are an efficient form of taxation as part of long-term investing, you’re still on the hook for taxation at some point.
So, all this to say, there is no free lunch when it comes to taxation – but if your goal is to defer capital gains for an extended period of time these funds can be a great solution over far more expensive, and far less diversified solutions!
Personally, I love the plain-vanilla ETFs with no frills, without the use of swap-based agreements but then again, I don’t invest in any ETFs outside my RRSP.
I am a regular reader of your website and have a question. I am looking to create a dividend only portfolio that provides monthly income, highest return and lowest risk. Which dividend stocks or ETFs would you recommend?
Boy, it would be nice to know the future, so I could tell you how to maximize income/return and minimize risk over time. My crystal ball is always very cloudy though!
Kidding aside, there are some “defensive” stocks and some ETFs to consider…
I like Canadian utility companies myself for income. The way I see it, everyone wants to heat or cool their homes in Canada – we all need energy and electricity. Based on that thesis I own many of the stocks in the iShares ETF XUT directly.
I also believe a great way to Beat the Banks is to own Canadian bank stocks. I do (and most of us do via low-cost Canadian ETFs or pension funds anyhow).
If you don’t want to worry about stock selection risk (i.e., what happens if one or two or few companies totally go under???) I would also consider some low-cost, income-oriented ETFs on these page here – offering some growth but also some income.
With any ETF, including dividend ETFs, I certainly can’t guarantee the distributions from these funds will continue to go up (they could stay flat or they could fall), you should have assurance you will receive some income, diversification and some growth all working in your favour over a long investing period.
You may also wish to Google some low-volatility ETFs, like the BMO ZLB fund. “Low-vol” funds fit into a category of “smart-beta” funds which is really a fancy term to suggest that you can get strong equity returns from proven factors designed into the fund. Examples: funds that re-balance to own inexpensive stocks (value), funds that hold stocks that are trending positively in price and earnings growth (momentum) or funds that hold stocks that exhibit greater price stability than the market as a whole (low volatility).
If you want to read about smart-beta funds – check this out – the executive management team from First Asset Management was kind enough to talk to yours truly about these funds here (no affiliation – just good knowledge to share)!
“Low-vol” funds tend to invest in less volatile or defensive stocks that may benefit from a smaller decline during market corrections, while still increasing in price during advancing markets.
Thanks for your reader questions – I enjoy them and learn from them.
Onwards and upwards
Thanks to some disciplined investing, sticking to our plan and holding the stocks we do; reinvesting most dividends paid wherever possible, we’re on pace to earn $18,400 this calendar year in dividend income from our non-registered account and TFSAs.
Onwards and upwards! Stay tuned for an update next month and a book giveaway about Your Ever Growing Income later this week!