May 2022 Dividend Income Update
Ah yes, dividends vs. total return. The debate rages on. One that will never end.
More on that in a bit!
Recently, Rob Carrick in The Globe and Mail published an article entitled “It’s an ideal time for adopting the Number One defensive investing strategy for retirees” (subscribers only).
That article caught my eye (among other bloggers) with keen interest for a few reasons.
For one, “the best way to protect your retirement savings from a market crash is to safely park enough money to cover your income needs for two to three years” – is certainly not a bad idea.
As I prepare for any sort of semi-retirement plunge in a few years, I’ve researched and know the value of a cash wedge of sorts.
A cash wedge can work like this:
- Year 1 – a small portion of your retirement portfolio is used for income withdrawals; money is allocated to a conservative but highly accessible mix of cash or money market funds. This is the bucket where you draw your retirement income from if you need it for a year.
- Years 2 and 3 – another portion of your retirement portfolio is allocated into a guaranteed short-term investment, such as a 1-2 year Guaranteed Investment Certificate (GIC), some bonds or some fixed-income funds. It could also be cash as you wish. On maturity when using GICs, these investments are used to replenish the retirement income bucket you’ll withdraw from (i.e., Year 1).
- Years 4+ – the rest of your portfolio is left to grow, as a diversified equity portfolio, providing growth for future years and to fund the early-year buckets. Maybe by then, the equity markets have rebounded a bit.
So, with a slight uptick in interest rates, a cash wedge can provide a nice buffer from falling equities.
Two, Rob’s article goes on to mention that “the best strategy for protecting a RRIF against inevitable stock market declines is to keep a reserve of money to draw from when selling stocks or equity funds would lock in a serious loss. At bare minimum, have enough money for one year. At best, try for two to three years”.
Again, a cash buffer held in a high interest savings account and/or a mix of GICs is likely very smart to weather stock market uncertainty – at least 1-years’ worth in cash. That’s my plan. This way, you have some cash in hand that is safely tucked away that can give stocks time to recover from any meaningful short-term decline.
Of course, beyond any cash wedge or buffer, you should learn to live with stocks and consider holding some dividend paying companies in your portfolio. Yes, total return matters. In your asset preservation years, you might be more concerned with how much income your portfolio can reasonabiy generate.
I’ve hinted about my bucket strategy for years on this site, for any asset preservation years.
This remains my plan as I approach semi-retirement:
Dividends and distributions will be very helpful for me in semi-retirement (beyond at least 1-years’ worth of cash savings) for a few key reasons:
- I can use dividends and distributions to pay for day-to-day expenses.
- I can use rising dividends to help offset some inflation. So, when companies increase their annual payout rate, my income should grow too.
- I can “live off dividends” to a degree to combat Rob’s point above: “protecting….against inevitable stock market declines….”. This means when I work part-time during semi-retirement, I should not be forced to sell anything unless I want to. My hope is many if not all my dividend growth stocks will continue to pay their dividends AND grow their dividends over time.
While this may sound rather defensive (and some might argue we might be prone to oversaving for semi-retirement based on this approach), this approach and mindset works for us.
Dividends vs. total return – FIGHT! FIGHT! 🙂
You might recall from a recent Weekend Reading edition there was also a healthy discussion in The Star about dividend investing vs. total market returns. That debate rages on…
I would agree. Individual stocks are not for everyone.
But there’s more to the story…
- Dividends paid from individual stocks to shareholders provide investors “optionality”. Dividends are paid from the company’s earnings and cash flow – so investors can decide to spend those dividends, reinvest those dividends for a more total return approach, or use the money to invest in other ways, as they please.
- Dividends are therefore just part of a total return approach.
- Dividends can help investors psychologically and emotionally and financially – stay the investing course.
I like dividends for many reasons and will continue to do so, as I prepare for semi-retirement. However, all investors need to be mindful that total return, or at least seeking the best returns possible aligned to your risk tolerance and goals – is what really matters. Besides, personal finance is way more emotions over math – what keeps your plan and objectives intact over time.
Here is someone more famous than I will be, on his personal confessions when it comes to emotions over math:
- “We own our house without a mortgage, which is the worst financial decision we’ve ever made but the best money decision we’ve ever made.” “On paper (paying off a mortgage with rates so low), it’s defenseless. But it works for us.”
- “We also keep a higher percentage of our assets in cash than most financial advisors would recommend – something around 20% of our assets outside the value of our house. This is also close to indefensible on paper, and I’m not recommending it to others. It’s just what works for us.”
Read on: The Psychology of Money.
May 2022 Dividend Income Update
Thanks to many recent bank raises in my portfolio, my forward dividend income for 2022 took a major boost:
- CIBC (CM) raised by 3%.
- Bank on Montreal (BMO) raised by 4.5%.
- Bank of Nova Scotia (BNS) raised by 3%.
- Royal Bank (RY) raised by 7%.
- National Bank (NA) raised by 6%.
What? No raise by TD…? Nope, but they raised their dividend back in December 2021 🙂
Well, it’s a LOT higher now!
My long-term target has always been to earn $30,000 per year from a few key accounts to start semi-retirement with. After a decade + of saving and investing, that goal is very much in reach now!
My May 2022 forward dividend income is now $26,904.
That’s almost $700 higher than just last month.
To put that income into perspective:
- Almost half of that annual income is tax-free. Yes, all true. We will not pay tax on that income when we decide to withdraw monies from our TFSAs.
- Our forward dividend income continues to rise every month thanks to compounding power alone.
- $26,904 in annual income translates to earning now $3 per hour of every hour of every day in my sleep. That’s at least $73 per day from part of our portfolio with me, just wait for it, doing nothing.
Thanks for reading and sharing, and a reminder to please bring forward your comments and questions for any future updates!
Questions about my investing journey, how I report our dividend income is covered on my FAQs page.
You can learn about the stocks I own, why, and learn how to Beat the TSX yourself on this page here.