September 2017 Dividend Income Update
Welcome to my latest dividend income update.
For those of you new to these posts on my site, every month I discuss our approach to investing focusing on Canadian dividend paying stocks. We believe buying and holding a number of Canadian dividend-paying stocks in our tax-free (thanks TFSA) and non-registered accounts will, over time, provide some steady monthly income for future wants and needs in retirement.
This month, I got some more reader questions:
Hi Mark, I’m a newb. I have some money in a RRSP in a daily interest account. Would it be wise to convert this account in order to buy a combination of ETFs and dividend stocks? Also, I’m thinking about DRIPping my stocks with a transfer agent but I’m not clear on the tax implications. Can you help?
Well, I can certainly offer some perspectives but ultimately your financial decisions are your responsibility.
That said, I believe any money saved and invested inside any RRSP should focus on growth and income generation, not daily interest. You can check out my RRSP 101 post here. So, because I believe in this I choose to own low-cost, growth and income oriented ETFs inside my RRSP. I also own a few Canadian dividend paying stocks and U.S. dividend paying stocks inside my RRSP – for growth and income. The RRSP is an excellent tax-deferred growth and income shelter account for many Canadians to take advantage of. (The TFSA might be even better though!)
Now, to your question about DRIPping stocks with a transfer agent. I think that’s a difficult call and certainly not one I could make without knowing your complete financial situation.
Given you’re using your RRSP to hold daily interest products, I’ll assume you’re starting out on your investing journey. If so, I would probably steer clear of non-registered investing (with transfer agents) at this time. While there are benefits of owning Canadian dividend paying stocks for growth and income, there are a number of tax implications associated with non-registered investing – you can read my comprehensive DRIP series here. Instead of non-registered investing I would strongly consider you read up about the benefits of the Tax Free Savings Account (TFSA) in my links above and strive to maximize all contributions to that account first. Since the inception of the TFSA, assuming you haven’t used all your contribution room yet, that would mean you could contribute $52,000 to this account – to invest in your ETFs or stocks. That’s a good chunk of change. I believe tax free investing and therefore tax free dividends is far better than taxable investing – including all “newbs”! Once you get your TFSA fully maxed out, along with your RRSP, then potentially non-registered investing could be right for you.
When it comes to our plan, we buy a number of Canadian stocks, some of them listed here, and hold them. Many of these stocks are inside our TFSA. We don’t trade them frequently nor do we sell them when we hear bad news. For the most part, we collect dividends from those stocks and we reinvest those dividends every month and quarter inside our TFSA for future income. Since my RRSP is already maxed out, we do invest in the aforementioned non-registered account as well for dividend growth and income. We’re optimistic if we keep maxing out our TFSAs every year, reinvesting most dividends paid and with any money left over we invest inside our non-registered accounts, we’ll come close to reaching $15,000 in dividend income later this year.
This would be exactly halfway to our passive income goal for an early retirement – ignoring any assets inside our RRSPs or future workplace pension plan income.
Things are coming together for us and I’ll be back next month to share another update.
Thanks for your questions and keep them coming.
Mark
My name is Mark Seed - the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, I'm looking to start semi-retirement soon, sooner than most. Find out how, what I did, and what you can learn to tailor your own financial independence path. Join the newsletter read by thousands each day, always FREE.
Congrats on being half way! My forward is more than half of yours but I hope to increase it further next year 🙂 I’m aiming for growth (so I have a lot of ETFs, more ETFs which have a measly dividend than juicier dividend stocks), YTD is 8.5% so far and then will focus on income (dividend income) once I get closer to my portfolio goal.
Your plan is coming along…well done. I only have a few ETFs and I only plan on owning 2-3 of them for extra diversification. Ones like VYM or VTI long-term, VXUS is another. IDV is also a future consideration. All the best.
Hey Mark,
Do your project out dividend increases in your dividend chart? Is this just based on the increase in principal and the current dividend rate as a % of principal? Or do you project out the dividend $’s per share into the future?
I estimate an increase in principal (about $15000 added should yield close to $600-$700 more next year) + a small % in dividend rate. The big spike occurs when we might be able to kill debt and therefore increase capital/principal by almost double. Time will tell!
MOA,
That forward dividend income chart is awesome. Looks like the growth is really going to take off in a couple of years. Looking forward to seeing you aim for the goal and knock it out!
Bert
I hope we do! Thanks for being a fan.
@leo. Why buy an index and be like the masses? Learn how to invest and get better returns. I agree with Cannew.
Some index funds allow for smaller purchases with no acquisition costs making it ideal for a monthly purchase plan. Set it up and don’t worry about it while you learn how investing works. When a person is starting out they often don’t have large enough sums to be purchasing enough to warrant the fee. So in some cases an index fund is a good move.
In hindsight..I think failing in penny stocks and with pricey mutuals got me/forced me to learn. ETFs weren’t well understood nor common 20 years ago.
I would also encourage some newbs to strongly conisder a robo- advisor if just starting out. The less money mistakes you make the better 😉 I know I made many Lloyd. Mark
Lots of truth to that Mike!
MOA –
It looks as though year 2019-2020 has insane div growth – reason for that? Or should growth from 2017-2018 and from 2018-2019 be modified upward slightly? Pumped for you!
-Lanny
Consider how much one has to invest or save.
1. If one has a matching company rrsp, max it out first
2. Without a company plan, put as much as one can into a TFSA, before adding funds to an RRSP, especially if one cannot max the tfsa
3. I suggest buying one solid DG stock (bank, utility, comm or pipeline), reinvest the dividends and add to the one stock or add other DG stocks over time. Don’t get too worried about Diversification if you are just starting out, rather stick with good companies with a long history of solid earnings.
3. If married with kids don’t forget to add funds to an resp
4. Add to an rrsp after the above are maxed out.
5. If one still has funds to invest than use non-registered accounts.
2 & 4 depend upon circumstances. Using an RRSP to recover taxes may be a valid first choice in some cases.
Very good list!
Too many young employees do not participate in the company match nowadays. They opt to lease BMWs instead …
Maximizing one’s registered accounts (RRSP and TFSA) is definitely a great way to start one’s investment journey to build wealth. By maximizing one’s tax sheltered accounts, one’s money can grow faster and have more compounding power in the long run.
For a newbie, the important thing is to start with index first to gain the investment experience and to buy some time to learn about the market cycle. Secondly, take the time to learn the ins and outs of the financial markets. Here are a few things research:
1) dollar cost averaging.
2) be greedy when people are fearful
3) tax for different types of income
4) investment fees for advisors and investment products such as mutual funds and ETF.
5) long term market average returns
“For a newbie, the important thing is to start with index first to gain the investment experience ”
How does one gain experience by buying an index? One gains experience by reading and learning what makes successful companies and how they are affected by changing markets. Learn which companies have a long history of sustained earnings and growth over a number of market downturns and continue to grow.
Mark, I think your formula is right on.
1) Max out the retirement accounts
2) With any excess funds, fund the non retirement accounts
In both cases 1 and 2 invest in a mix a low cost ETFs and dividend paying stocks with the objectives of income, income growth and capital appreciation.
Thanks for the post. Tom
In point 1) I think in the early age when your income is low, you want to max out TFSA, then as you increase your income and consequently move up the tax bracket, you want to favor RRSP. At some point in life, you may be able to over contribute in the year to reach your maximum or even switch the TFSA money over to your RRSP.
It’s simply a better tax efficient approach unless you have money to max out TFSA and RRSP than go ahead.
I fully agree with TFSA first. The reality is many Canadians cannot afford nor save enough to max out 2 registered acounts…not three if they have kids (i.e., RESP).
Max out TFSA and if you make good money then max out RRSP or RESP if you can.