November 2022 Dividend Income Update
Wow, this year is flying by…
Welcome to my latest monthly dividend income update: my November 2021 dividend income update.
Putting assets in the right location
As a passionate investor and subscriber to this site, you already know that I have a two-pronged hybrid approach to investing:
- Approach #1 – we own a number of Canadian dividend paying stocks for rising dividend income and growth.
- We own almost 30 different Canadian stocks between our two non-registered accounts and our two Tax Free Savings Accounts (TFSAs). We own these stocks because we believe buying and holding our DIY bundle of Canadian dividend-paying stocks will, over time, provide some steady monthly income for future wants and needs in retirement.
- Approach #2 – we’re owning more units of low-cost U.S. Exchange Traded Funds (ETFs) inside our RRSPs over time.
- Yes, while dividend paying stocks are great, including those from the U.S. we own (examples are Procter & Gamble, BlackRock, and Johnson & Johnson to name a few) we’re buying more (and holding more) low-cost ETF units over time for lazy total returns.
- In our non-registered accounts + our TFSAs we own mostly Canadian stocks.
- In our RRSPs we own mostly U.S. stocks and ETFs.
This approach remains helpful to highlight since it aligns directly with my income needs related portfolio drawdown thoughts.
Dividend income taxation versus capital gains taxation
When I was just starting out my dividend income investing journey, I found the rules around dividend taxation very messy and confusing to say the least. Yet, over decades in support of my investing journey I’ve learned dividends can be an efficient form of taxation while delivering the sought-after meaningful income I intend to spend in semi-retirement as I work part-time.
- In Ontario (where I live), a person can earn up to $35,000 in non-eligible dividends, or about $50,000 in eligible dividends and pay no tax (other than health premiums) as long as they have no other income.
- If a person is entitled to a spousal tax credit, dividend income can sometimes be transferred between spouses on their tax returns to minimize tax.
But, dividends aren’t everything:
- For seniors receiving Old Age Security (OAS) benefits, the dividend gross-up system can cause the loss of benefits if the dividend gross-up causes a senior to have income above the clawback threshold. (Really, I’ve always mentioned that any OAS clawbacks are a nice high income problem to have!!)
- Dividend income is taxed, certainly when combined with other income sources above certain levels in a taxable account, so when an investor has significant dividend income, capital gains could be a much more efficient form of taxation.
That brings me to this: income types are treated differently by the Canada Revenue Agency (CRA) which makes our tax system very challenging to navigate. For example, like employment income, interest income typically earned on such investments as Guaranteed Investment Certificates (GICs) or savings accounts is taxed at an individual’s highest marginal tax rate, making it the least efficient form of investment income. This means, any GICs and/or bonds that deliver interest bearing income should usually be owned in registered accounts (such as TFSAs, RRSPs, RRIFs, etc.). Again, not always just some considerations for you.
This information is important to impart because it has provided long-term guidance to me (and hopefully to you?) on what assets you could consider owning where for tax purposes WHILE optimizing portfolio growth over time. My investing investing approach includes dividends but also capital gains/growth, purposely.
- Dividends paid to shareholders from Canadian corporations receive more favourable tax treatment, since this type of income benefits from the federal dividend tax credit. Therefore, far more than interest income, dividend income is more tax-efficient which ultimately means that investors in dividend-paying investments keep more of what they earn after taxes.
- Capital gains are an outstanding way to invest – given gains materialize when you sell your investment for a higher price than what you paid for it. This difference is recognized as taxable income. Capital gains also receive relatively favourable tax treatment, since only half of the capital gain is subject to taxation.
Here is a quick summary of in table format what I shared above, distributions you may receive and how they are taxed:
|Type of distribution||Description||Tax Treatment|
|Interest||Interest is earned on investments such as GICs and bonds.||Fully taxable at the same marginal tax rate as ordinary income, like employment income.|
|Canadian dividends||Income when you invest in shares of Canadian public corporations that pay dividends.||Preferential tax treatment for individuals through dividend tax credits as either eligible or non-eligible dividends.|
|Capital gains||Realized when an investment is sold for more than the adjusted cost based (ACB) of the investment.||Preferential tax treatment as only 50% of a capital gain is taxable.|
There are also foreign dividends and return of capital (ROC) as potential tax liabilities, but I’ll leave that post for another day.
Dividend income versus self-made dividends via capital gains
Some points to hit on, as they relate to this debate:
- Total returns (always) matter. That means, whether my income is derived from a mix of capital gains, dividends or interest, it is my hope to get the best possible returns to help realize my spending goals.
- Income really matters to me/us. That means, while I strive to achieve strong total returns, as an investor I can’t help but feel and invest in a way that gives me comfort: dividend investing delivers tangible, usable, real income from my portfolio. I will be using the income generated from our taxable portfolio that is part of these reports, in a few years in fact, to help fund part of our lifestyle.
- Optimal tax efficiency is great but not at the expense of #1 or #2 above. That means, achieving tax efficiency while very important should never be the first consideration in any investment plan – at least this is not for us. This means, while lower taxation is great and remains an objective, I don’t want taxation to veto my personal finance objectives.
So this brings me back to my income needs and portfolio drawdown thoughts.
November 2022 Dividend Income Update
Earning $30,000 per year inside our tax-free (thanks TFSA) and inside our taxable accounts has always been a multi-decade goal on this site since we believe that income will cover most of our basic living expenses for as long as we live.
That said…we need to consider how we might drawdown the portfolio…
Depending on when you plan to retire or semi-retire, like I might, the tax consequences involved, and much more, you can probably appreciate the drawdown order could be very different between any two retirees.
This means for us, even if/when we hit our desired target above, it is very likely we will not tap any TFSA assets in particular for the coming decades. Rather, the TFSA income stream will be there when we need it.
Here are some key ideas/sequences to consider and I’ll link to my currently preferred drawdown order later.
1. NRT = Non-registered (N), RRSPs (R), TFSAs (T)
This sequence might work well if you have built up a modest taxable account value by your 50s or 60s and you might have higher income needs and wants in retirement.
To fight longevity risk, you can exhaust your non-registered account first, allowing tax-deferred money (RRSP) and tax-free investments (TFSA) to grow and compound away.
NRT might work well for those to fight longevity risk, may apply to those retirees with any workplace pensions to draw from, and help those investors who wish to defer Canada Pension Plan (CPP) and/or Old Age Security (OAS) benefits until a maximum age.
2. NTR = Non-registered (N), TFSAs (T), RRSPs (R)
Also in this sequence, you can consider tapping your taxable account first but reverse the order between TFSAs and RRSPs – keeping RRSP assets “until the end”.
The benefit of this approach is you have some long-term income splitting opportunities, while money continues to compound tax-deferred. (If you are the recipient of a pension and are 65 or older, you may split income from your RRSP, RRIF, life annuity, and other qualifying payments.)
The challenge however for some retirees is by keeping RRSP/RRIF assets preserved well into their 70s and 80s, these seniors could be subject to OAS clawbacks depending on their income level. Recall OAS is an inflation-protected government benefit that few retirees want clawed back!
Of course, there are combinations of orders to consider including blended approaches that might work well for many but the punchline is usually the same when it comes to any of my portfolio drawdown analysis:
- the ability and opportunity to “smooth out taxes” is ideal (to avoid lumpy tax hits in any one year), while
- meeting income needs every year that rise and combat inflation and other retirement headwinds, while
- preserving some smart tax-efficient estate management approaches as you age.
My drawdown order
As a planned (hopefully!) semi-retiree in a few years, I’m thinking my portfolio drawdown order will be primarily NRT.
N – Regarding non-registered accounts
- Work part-time in our 50s and “live off dividends” from non-registered accounts and/or make slow capital withdrawals.
R – Regarding RRSPs/RRIFs
- In our 50s and 60s, slowly drawdown RRSPs and eventually convert RRSPs to RRIFs.
T – Regarding TFSAs
- We don’t intend to touch our TFSA assets in any early retirement.
- By our late-70s and early-80s, with likely non-registered assets and our RRSPs/RRIFs nearly gone, we can potentially “live off tax-free dividends” (thanks TFSAs!) along with some government benefits (CPP and OAS).
November 2022 Dividend Income Update Summary
At this point in the post, you’ve learned about why I’ve been so focused on building up various income streams across our portfolio over the years, what assets go where, and hopefully how I’m intending to tap those income streams in some possible drawdown orders.
We started 2022 with a potential dividend income target.
We’ve blown past that target thanks to reinvested dividends, adding some new capital but also thanks to many, many dividend raises in 2022.
While dividends from any stocks are never guaranteed (looking at you AQN!), we continue to believe owning a collection of dividend paying stocks puts the odds of long-term income and growth for semi-retirement fun in our favour.
As of this past month, our November 2022 forward dividend income for the year now sits at $28,909.
That income accelerated a bunch thanks to these recent raises:
- TD – 7.9% increase
- NA – 5.4% increase
- BMO – 3% increase
- RY – 3% increase
- CM – 2.4% increase.
That income total is what we should earn, by the end of December 2022, should no dividends get cut, no dividends get reinvested, and I don’t buy anything else this year inside some of our key wealth-building investment portfolio accounts.
I do of course hope no dividends get cut or reduced and I will reinvest my dividends earned inside the TFSAs for sure – so this income should be higher in another few weeks.
This income level by far and away exceeds our desired 2022 goal when we started investing this year.
To put that forward dividend income into perspective:
- Almost half of that annual income is tax-free for future retirement spending and fun.
- This income translates to earning about $2,409 per month.
- This income also means we earn close to $80 per day.
Thanks for reading and sharing.
I look forward to your questions or just comments as I plan to publish our final 2022 tally in a few more weeks!
Further reading including my perferred drawdown order:
And other reads:
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- How much can I safely spend in retirement?
- Will I run out of money?
- What accounts should I drawdown first?
- What is the best drawdown order for tax efficiency?
- When should I take CPP or OAS?
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