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.
Further Reading: What is a cash wedge and how it works to open up income investment taps.
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.
You can see how I built my dividend income portfolio here.
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…
Some financial experts would argue dividend paying stocks are not for eveyone.
I would agree. They are not for everyone for sure.
But there’s more to the story…
- Dividends paid 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 🙂
Last month, I hinted our forward annual dividend income might be much higher later this year after a few more dividend hikes coupled with consistently reinvesting dividends along the way.
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.
Different strokes for different folks!
My “liquid” cash wedge can easily carry me 4-5mths along with the various gov money coming in.
Other than that my “other” cash wedge (taxable account) is fully invested. Approx. $24K COP now worth approx $32K depending on the daily market – give or take a thou$. That is paying me $225 in Divs per month avg or $2.7K yr which is taxed as dividends. So that is basically another month or two of “cash” wedge
So, yes, do keep some cash but sleeping on that pile can be a bit lumpy, at least for me.
What is “COP”? Thanks
COP – Cost Of Purchase.
What I paid to buy the shares.
Thanks. I understand that more than this from investopedia.com: “A certificate of participation (COP) allows investors to participate in a pro-rata share of a lease-financing agreement.”
Hadn’t heard of that before.
Sounds like the cost to enter an event like a 5K or something like that
I think that’s great you keep some cash on the side – it’s smart to pounce when equities go on sale!
Hell of a nice progress update MARK.
As for all of the other good points you made in this post….YES.
LOL. Thanks my friend. I’m just trying to stay out of my own investing way now as the finish line of this full-time work marathon approaches.
All the power to you. You are and you will!
BTW I know something about marathons- both running and work! ha
LOL. Have a great weekend!! Out for a long walk soon!
Nice post today and your dividend income trajectory is really something. A $2000 year to year increase is actually quite a big jump. Assuming a 4% average yield, creating another $166.00/ month is a great goal + achievement.
These days I am a little careful when stating something like this line (in your post) to people, you get a mixed reaction. I don’t think the majority of people understand why we get paid dividends.
“That’s at least $73 per day from part of our portfolio with me, just wait for it, doing nothing.”
I have had people get mad at me when i casually state a similar statement. The journey getting to that point where we can say this, was by definitely not “doing nothing”… We saved and sacrificed in some ways, when others didn’t. We loaned after tax dollars we worked hard for (and take personal risk on) to other companies so they can innovate and grow with the understanding we will benefit from that long term. We had to do the research to try to make the best decisions on what stocks / securities we invest in.
So when i try to explain investing now to others and being paid dividends specifically, I do my best to explain the journey rather than the result. If i just state I make money while I’m sleeping, some people truly believe that some shmuck employees laboring making pizzas over at an Pizza pizza or burgers at A+W making minimum wage, are making me rich through their sweat + toil… They think that is wrong in principle because they only see the result. This group of people seems to be growing as well which is concerning.
The very odd taxable purchase (TFSAs, RRSPs are maxed) but mostly all the growth is via reinvested dividends + dividend increases. Those banks provided a nice boost.
I suspect if no dividends are cut or reduced, maybe a few more raises this year? (FTS, EMA, TD later this year…) and once we max out TFSAs in the coming 1-2 years, we’ll hit our goal of $30k per year.
It’s just math working for us now 🙂
That’s a very fair comment Paul, and I will take that into consideration next month. To your point, I have certainly tried to learn about investing, my behaviour with money, so that wasn’t “doing nothing”. The process to get here (see graph) is certainly not an overnight deal. People forget about the process and focus on the result – which is of course the wrong way to look at investing. Thanks for your comment and feedback, well put to me 🙂
Aghhh the beauty of dividends in the big picture, especially in sei-retirement. As you said;
“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. ”
I din’t want to stop working, I just wanted to end working for someone else and do something part time on my terms. FIRE allowed me to do this and now I make just enough that drawing only dividends from my RRSP the last 5 years has helped me live a nice enjoyable life while I made a small part time income.
**I reinvest all dividends within my TFSA still and transfer my max annual contribution from RRSP into TFSA also so it grows. No touching that account 🙂
Chris, I think you have it made. Small business owner, working at something you love, and some passive income via your ETFs.
This says it all:
“FIRE allowed me to do this and now I make just enough that drawing only dividends from my RRSP the last 5 years has helped me live a nice enjoyable life while I made a small part time income.”
“I’m tired of feeling there is only one way to invest.”
I agree Mark, but I’ll continue to stress the key difference that investing for income offers. I know that one will earn more income, with much less stress, by following the specific strategy, than mixing and matching. They may not believe me, but I continue to provide the proof, each month, with my WS Updates.
Keep up the updates Henry!
Here’s a question for you Mark: Where should your cash wedge reside? Options being non-registered, interest taxed 100% at marginal rate annually, RRSP interest taxed 100% at marginal rate when withdrawn, or TFSA interest not taxed?
For me, Bob, I have a small corporation so I’m likely to keep my cash wedge = 1-years’ worth of cash there with some of it into a higher interest savings account. Yes, cash in interest savings is not likely to keep up with current inflation but that’s not the point for me. I want $50k or so in cash, ready, if and when I need it or want including when I don’t want to sell any stocks or dividend stocks or ETFs for a year if/when that happens and I need the cash to spend instead.
For me, in terms of investing to take advantage of long-term growth to offset inflation, higher taxes, etc. since I have a small DB pension (= bond) then:
1. taxable investing = all CDN dividend paying stocks.
2. RRSP investing = mix of CDN stocks, U.S. stocks and ETFs.
3. TFSA investing = CDN dividend paying stocks and ETFs.
4. LIRA investing = U.S. stocks and ETFs.
Cash savings are interest savings account and $$ inside my corporation.
I hope that helps!
Nice to hear from you!
A “corporation” eh, I’ll look into that. Thanks
Yes, I incorporated a few years ago. This blog makes some small income so I decided to avoid getting taxed at my personal rate, to incorporate and create a business. I will eventually declare a dividend from my corporation or determine a small salary from the corp. for part-time income in semi-retirement, potentially with other work as well. That’s the plan in a few years. 🙂 Don’t tell my boss!
I will keep a small cash wedge/float of cash inside the corporation and not invest that money, pull $$ out each year via dividends or salary.
I will also keep some cash (personal) savings inside any higher interest savings account to be very liquid; i.e., could pull $10k or $20k out with ease without any sales of my dividend stocks or ETFs. I will “live off dividends” + part-time income in the coming years, as to avoid any major sequenece of returns risks in early retirement. The cash will be sitting there just in case the part-time income drops and/or I simply need the money for something major.
Otherwise, I don’t see myself drawing down any capital from my portfolio until my 60s and 70s. That’s the current thinking of course!
Thanks for the comprehensive reply Mark.
Mark, I particularly like the following statement in your post:
‘Dividends paid to shareholders provide investors “optionality”.’
I think the evidence, as you acknowledged, is that if the dividends are reinvested, then the [total] returns on stocks that pay dividends vs stocks that don’t is going to be similar. Those dividends are easier to come by, ie they get paid into your account automatically, rather than having to sell stocks to utilize the additional gain over the dividend stock. One “however” comes to mind though; increased risk though a lack of diversification. I know you address this in your portfolio by having a blend of dividend and ETF assets. A good approach in my book.
I’m very happy today that I have the cash cushion/wedge. Regardless of how the markets perform over the next 2 to 3 years, we will be fine and we won’t have to cut back on our spending plans. We also have bonds, but they suck right now and I’ll probably leave them be.
That’s exactly it: “optionality”. The option to take some cash from the company as dividends as do as you please OR reinvest dividends as part of a total return approach in the company – just like a stock that wouldn’t pay any dividends at all. It’s really that simple I think.
I personally take a total return approach right now since I reinvest all dividends but that won’t be the case in semi-retirement. I’ll need (for sure), income from my taxable account and RRSP withdrawals to live from. That’s OK – I mean – I’ve been working and investing my entire life for this!
Having cash, ready, to invest, for emergencies, other really helps me sleep at night. Again, it’s about 1-years’ worth for us but that tolerance may vary from person to person. I just know if I needed money, tomorrow, a bunch of it, I wouldn’t have to sell any stocks, ETFs, other and I would remain invested whether the market is down -20% or up +20%. My plan is largely built around resilience and being flexible. Cash helps for me/us.
Dividend vs Total return is an endless debate fore sure. I am 51, semi-retired (self employed so only retirement income is from investments) and I often argue with my son (studying in finance) about that. He likes total return more than dividend and I am the opposite. 20 years ago I did not care about dividend cash flow because I was pretty sure return would be realized in the next few years and my income was from work. Now it’s different. I need cash flow to live. He argues that if I have a good stock, I can sell say 5% of it each month and that will be my cash flow, with bonus capital gain fiscal treatment instead of dividend fiscal treatment. I argue that is true, but it suchs to sell say my Berkshire stock when it’s down in a bear market. Then I could sell a little more when it’s up and not when it’s down, but that trying to time the market and that’s not good. Also, besides income cash flow, dividends allow me to allocate capital myself while using cash flow from different businesses. Depending how good one is at that, it can be rewarding. Buffet does not like to pay dividends because he is a very good capital allocator, but he often chooses businesses that pay some dividends to be able to allocate capital by himself thenafter. So in the end, near retirement, I would say it is better to own more dividend stocks and be able to allocate capital by yourself to live or to invest. It is also very comforting to see the income stream flow into your accounts each quarter.
Ha. I hear ya.
I’ve met sooo many die-hard indexers over the years that say I will not be successful if I follow this approach, blah, blah, I finally said to myself I’m tired of feeling there is only one way to invest. Folks can be successful with private equity, real estate, dividends, growth stocks, etc. but some folks don’t want to hear it. I tune it out now for the most part.
The key for me has always been to invest in a manner that helps meet your goals and in a manner you can stick to. If that happens to be a mixed bag of real estate, private equity, dividends, total return ETFs – good on you. Who am I to argue that’s not helpful to your personal plan? 🙂
I think the die-hard total return camp has a bit of a bias because some advisors’ paychecks are reliant on telling others/clients that total returns matter. I mean, they have to put food on the table too JF.
I wonder if your son realizes part of the reason you can semi-retire at age 51 is you invested in yourself/self-employed and because you had a decent savings rate, that’s the plan that worked for you. That’s all that mattered. Just a thought 🙂 Kudos.