October 2018 Dividend Income Update
Possessing a good dose of market history can do wonders for the financial mind.
Whether it was living through Black Monday of the October 1987 crash, the dot-com crash nearly 20 years ago, the financial crisis now a distant ten years ago, or the hand-wringing related to recent stock market volatility – the lesson should remain the same: stay invested and stick with your plan.
This lesson in behavioural finance is very relevant right now because many people believe another market crash is imminent. It might happen next week. It could happen next month. Or maybe that crash is coming in early 2019. It might not even happen at all!
The reality is, even amongst all the financial experts in the world, nobody knows when any stock market calamity will strike. And for investors like you and I who embrace that wisdom, that’s a very good thing…
Over the years of running this blog, largely a financial diary of my thoughts, perspectives, massive financial failures (but also some decent success stories), I’d like to think I’ve learned a few things when it comes to personal finances and investing.
In no particular order:
- Be a student of market history. Like I’ve mentioned above, try to train your investing brain. This way, you’ll learn that “this too shall pass” – you’ll stay invested in the stock market as much as possible for as long as possible.
- Avoid trading. Investors who dodge in and out of the market often get it wrong more often than they get it right. In holding assets (versus trading them away) you’ll save money on commission fees too – so that’s win-win.
- On the subject of financial fees, keep your money management fees as low as possible for as long as possible. Meaning, avoid high-priced financial funds or other expensive products. The only people that get wealthy associated with pricey products is the company that sells them.
- Be wary of any fund, company or financial product you can’t explain to a 10-year-old. Put options might be an example. If you buy a put option on, say, the S&P 500, you gain the right to sell the S&P 500 at a predetermined “strike price”. This option only works for a certain period though. If you don’t use it, the option expires worthless. So, a “put” or put option is a stock market device which gives the owner the right, but not the obligation, to sell an asset, at a specified price, by a predetermined date to a given party. Seems like a gamble on the negative value of the future. Why bother with that gamble if you don’t have to?
- Embrace diversification. Via owning many companies, within many different sectors of the economy, from many countries around the world is generally speaking a very good thing to do. By spreading your investment risk around using a combination of stocks, cash, fixed income, real estate and potentially commodities you benefit from what goes up and you’re not hit as hard as what comes down.
- Ultimately financial behaviour is the most important thing you and I can ever do to be successful. Your ability to save consistently, long-term with discipline; ignoring talking heads; investing in low-cost funds that hold hundreds if not thousands of stocks from around the world; sticking with a diverse basket of established companies that pay dividends – doing all this without fail for decades on end – is an excellent recipe for financial success.
This list bring me to this: based on my lessons learned and those of others, if you’re not already an active student of stock market history – get after it. Take those lessons and then map out a financial plan you can stick with. In doing so, I believe you will get wealthy eventually.
Using this site to document what I’ve learned, we’ve created a game plan. Our ultimate financial goals within the next 5-10 years remain aggressive but doable: 1) to be debt free and 2) own a $1 million investment portfolio beyond any workplace pensions or future government benefits for semi-retirement.
Slowly but surely, we’re getting closer to those two major goals – these monthly updates are a small part of journey.
In 5-10 years, as we chip away at our debt and become debt free:
- We intend to keep at least one years’ worth of basic living expenses in cash savings. That is likely somewhere up to $50,000. Such cash savings will be used for emergencies and/or if and when we need money and we do not wish to sell assets to get obtain this money. It will provide liquidity .
- After this one-year cash fund is tucked away in a high interest savings account, we will rely on the following for semi-retirement income beyond any workplace pensions:
- Cash flow from dividend-paying stocks from Canada and the U.S. (around 40 stocks in total; about 30 or so from Canada and about 10 or so from the U.S.). We will use the dividend income generated monthly and quarterly to pay for living expenses, keeping the cash buffer I mentioned above intact.
- Cash flow from a couple of low-cost, diversified, U.S. equity or dividend ETFs that pay distributions. Examples of those ETFs are VTI or HDV. We will spend the distributions generated by those ETFs each month and quarter, and eventually draw-down the capital.
- After we start drawing down some our RRSP capital in our 50s and 60s, we intend to take delayed CPP and/or OAS income (actual dates TBD!) to help smooth out taxes for the years ahead.
As you have probably gleaned above, the equity bias in our portfolio focuses on cash flow AND some capital appreciation. I believe this continues to be contrarian thinking since everyone these days seems obsessed with market value – what is my portfolio worth? While that’s very important; total return that’s not what I’m focused on. As I approach semi-retirement I focus on when and how much I will get paid from my portfolio – tangible money I can use without selling assets. Your mileage may vary. Furthermore, you’ll probably see I don’t mention bonds in my portfolio. I used to hold bonds in my portfolio many years ago. I don’t anymore. As you age, most gurus have long written about putting most of your assets into bonds (and less stocks) as you get older. I’m not one of those people. I’m learning to live more and more with stocks and so should you.
My math continues to tell me we’ll need about $30,000 per year in dividend income to fund our semi-retirement dreams, excluding any RRSP assets and any income from workplace pensions. Thanks in part to my activities with market history we’re getting closer, slowly but surely, to that goal every month.
At the time of this post, with some recent dividend increases (thanks Manulife) and with dividends continually reinvested, we’re approaching $17,000 in dividend income this calendar year excluding RRSP assets. We don’t dare touch this money because it’s for our future. The future is shaping up…
With a couple of months to go, I suspect we might even surpass that amount this calendar year – the arrow above was our status earlier this year. The calendar year income will rely on the companies we own continuing to pay dividends and avoiding any dividend cuts. I can’t predict that future but I can stick with my plan. We’re inching closer to some solid pre-retirement income to rely on – a journey that hasn’t happened overnight but one that has been cultivated over many, many disciplined years.
Will we reach that amount? Will we fall short? You’ll have to keep reading these monthly updates to find out!
Thanks for being a fan of the site. If you have any questions about our financial plans, portfolio and other saving and investing principles you could leverage for your own financial journey I’m happy to answer as many questions as I can. Keep them coming folks.