Welcome to my latest dividend income update. For those of you new to these posts on my site, every month I discuss my approach to investing focusing on dividend paying stocks. These posts remind you about the power of reinvested dividends over time.
To invest in dividend paying stocks, you need to realize the market value of these stocks will fluctuate. Sometimes you’ll experience huge price swings in a short period of time. If you can’t bear the thought of seeing your stock prices fall maybe this investing approach is not for you. Then again as my friend Andrew Hallam says you should cheer for stock market declines in your asset accumulation years. I know I do.
For this month’s dividend income update I thought I would highlight a few reasons why dividends matter to me.
Big Benefit #1 – Canadian Dividend Tax Credit
Dividends paid from many Canadian companies are eligible for a tax credit when you hold these companies in a non-registered account. In your RRSP every dollar of dividend paid will be taxed as income when withdrawn. In your TFSA the dividend tax credit is lost. The dividend tax credit is an advantage over other forms of income you might make, including employment income or income from other investments, like bonds or GICs. The taxation on employment income and interest is higher. Check out this post to learn more about the dividend tax credit. Since part of my portfolio is in a taxable account the dividend tax credit definitely matters to me.
Big Benefit #2 – Large Companies Hesitate To Cut Payments
Dividend-paying stocks probably don’t get enough credit. This is because providing 3% or 4% or 5% income is not nearly as sexy (or financially rewarding) as seeing your non-dividend paying stocks rocket up in value. However, can you predict those hot stocks and big payoffs in advance? I can’t.
Companies that pay dividends can’t fake those payments to shareholders for very long. Buying and holding an established company that has paid a dividend for a few decades is a good sign (at least from a historical perspective) that this company had enough cash flow to reward shareholders and stay in business. Large companies in particular hesitate to cut their dividends unless their cash situation is dire. There are many blue chip companies in Canada that have paid dividends for generations; Canadian banks, utility and pipeline companies are part of that list. I like the predictable cash flow that many of these companies provide.
Big Benefit #3 – I Stay Psyched About Our Financial Plan
There is definitely something positive seeing money earned from our investments rolling into our account, commission-free. As a dividend investor I get to focus on the annual income (which is what these posts are about) rather than the aforementioned daily price swings. When dividends roll in I have the option of reinvesting those dividends. I’m a fan of reinvesting dividends because money that makes money, can make more money next month or quarter. I think participating in dividend reinvestment plans (DRIPs) are a great way to stay psychologically motivated about your financial plan especially when markets get rough.
This last big benefit reminds of this quote from The Investor’s Manifesto by William Bernstein, an attribute of all successful investors:
Investors need “the emotional discipline to execute their planned strategy faithfully, come hell, high water, or the apparent end of capitalism as we know it.”
Thanks to the tax efficient dividend tax credit, blue chip stocks that consistently pay and grow their dividends over time, along with the psychological benefits that dividend investing can provide we’re on pace to earn just over $13,100 this calendar year from Canadian stocks. We’ll keep our boring plan intact going forward. Stay tuned for more updates later this year.
How is your retirement income machine coming along? Got any questions for our plan?