Weekend Reading – Dividend cuts, Smith Manoeuvre, It’s OK not to be OK, and more #moneystuff

Weekend Reading – Dividend cuts, Smith Manoeuvre, It’s OK not to be OK, and more #moneystuff

Hi Folks,

Welcome to my latest Weekend Reading edition where I share some of my favourite articles from the week that was across the personal finance and investing blogosphere.

I hope you’ve had a good week…

Earlier this week, I partnered up with fan and contributor to this site, fee-only financial planner Owen Winkelmolen who agreed this is a bulletproof retirement plan.

Spend more or retire earlier in this bulletproof retirement plan

As a preview for next week, I have a new book to giveaway and I might get around to sharing my latest (April) dividend income update. In the meantime, here is my previous update that highlights we are more than 67% towards realizing our semi-retirement goals.

Thanks very much for your readership and sharing this site with others.

In April, this site garnered over 70,000 views.

Thank you, thank you, thank you!

via GIPHY

Enjoy this Weekend Reading edition and stay well!

Mark

Weekend Reads

I read that Husky Energy slashed their dividend by 90% this week. Incredible but not surprising. Likely more bad news to come for oil and gas investors. My only integrated oil and gas play (beyond owning a few Canadian pipelines) right now is Suncor. Thankfully, that small position represents < 1% of my overall portfolio – should a dividend cut occur. I suspect it will over time.

That prediction aside, here are some top Canadian stocks to own to ride out the COVID-19 triggered market crisis.

A good episode here going in-depth into the Smith Manoeuvre on Explore FI Canada with Robinson Smith.

Good of Robinson to answer my question – for the most part. I asked the team to ask Robinson about really needing to use the HELOC (Home Equity Line of Credit) to invest. Instead, focus on paying down your mortgage through “normal” means while investing in registered accounts first (before taxable investing). His reply was fine but I think he missed the context of my question. I asked whether the complexity of this manoeuvre was really worth it and whether an overburdened Canadian population struggling to manage debt effectively should be toying with a HELOC. My context was you really need some significant financial discipline with this approach; as HELOC limits increase over time. I would argue most Canadians do not have that much financial willpower.

Overall, I think if you’re good with processes in your life and ** should you be good with money ** then some form of leveraged investing is reasonable. However, I would always be cautious about any leveraged investing should any of the following happen: 1) you lose your job; 2) you have any sort of healthcare scare and your income is impacted, and 3) the stock market takes a significant dive – as in now.

GenYMoney seemed to like Thinking Fast and Slow by Nobel Prize winner Daniel Kahneman. I thoroughly enjoyed this book as well and these were my takeaways from the same book. Highly recommend you read it. 

Chrissy from Eat Sleep Breathe FI wrote that she is not always OK with this COVID-19 crisis. Some quotes that resonated with me and how I feel about all this…

“The scale of what’s happening is so massive and unprecedented—it’s hard to make sense of it all.”

“How can our governments continue to dole out massive amounts of funding when the revenues have all but dried up? It’s not hard to see that the math doesn’t add up. Once this is all over, what will the ultimate cost be, and will we be able to afford it?”

I also have a sense of anxiety about the long term effects of this situation. I really have no idea other than much higher taxation how my cohort Gen X or the next generation, Gen Y, is going to afford this.

I’ve learned a few things from this COVID-19 crisis myself but more importantly I intend to:

1. Continue to reduce our carbon footprint with time; reduce waste; buy less crap. 
2. Eat better, exercise more and take more quiet time to enjoy life’s simple moments.
3. Be more grateful (although I am) and remain aware that these things sadly can and do happen – so prepare for it to some degree financially and emotionally. 

Although I’ve never been one to strive for FIRE (I have never really liked the “RE” part of this moniker) it was refreshing to listen to someone who focuses on the simple aspects of “FI” – as part of Financial Independence, Retire Early. A good podcast and one of the best I’ve listened to in the last few months.

There are six phases in my financial independence journey. I’m firmly in phase 4 now.

Should you delay your retirement because of COVID-19? Jon Chevreau makes some good points in this article.

I do believe for most of us semi-retirement makes the most sense. Some form of work (and income from it) will help you and I maintain a sense of purpose. That’s excellent for wellness. You should consider postponing retirement because of this crisis. 

Other fun stuff…

Speaking of retirement and opportunities to become a wealthier investor, you can find dozens of real-life case studies to help you determine your “how much is enough” number and free tools to use for your retirement or semi-retirement planning on my dedicated Retirement page.

Reader question of the week (adapted for the site):

Hey Mark,

I love your blog and have learned so much from it, and always look forward to each post. I also invest with a hybrid approach as you put it. I have a question on DRIPs – after skimming your page about it here.

Do you have a certain suggestion on how to figure out the quantity of stocks to purchase, to ensure the purchase is large enough to allow for a synthetic, whole-share DRIP at your brokerage?

Curious, how many stocks are your DRIPping right now?

Thanks so much!!

Thanks for your question and readership.

On my DRIPs page, let’s walk through the following example.

Pretend you own 100 shares of Company ABC. ABC just declared a dividend of $0.20 per share payable next week. This means in the coming days, you will get paid $20.00 for the 100 shares you own ($0.20 per share x 100 shares).

You already know dividends by ABC are paid quarterly, so you’ll get $20 every 3 months going forward unless ABC decides to raise, lower or stops their dividend payments to you. You never know with dividends!

That said, some companies have been paying dividends for generations…

Back to you, you have a few options about what to do with your $20. Let’s look at those:

Option 1 – you could take the $20 in cash.

Without running a synthetic DRIP, ABC will deposit the cash directly into your discount brokerage account. Cash in. No work needed.

Option 2 – you could enroll ABC (if eligible) in a DRIP with your brokerage.

In doing so, because 100 ABC shares paid you $20 in dividends, but the ABC share price is $18 in our example, then your synthetic DRIP would buy you 1 whole share of ABC (@ $18.00) and the rest would be paid in cash ($2.00).

You now own 101 ACB shares.

Now that you’ve enrolled your ABC Company in a DRIP this process will repeat for you every quarter so long as ABC pays a dividend and you own enough shares to reinvest one (1) full share.

The challenge is, you don’t know what the future share price will be on any given day!

So to your initial question you need to own enough shares not only to cover the share price today but by the next quarter should the share price rise when dividends are paid. You need to add in some buffer. Otherwise, continually rising share prices may not be enough to DRIP the stock (unless of course the dividend increases too).  Win-win.

Reader: do you have a certain suggestion on how to figure out the quantity of stocks to purchase, to ensure the purchase is large enough to allow for a synthetic, whole-share DRIP?

Essentially, my formula is:

(Share price) / (quarterly (or monthly) dividend payment per share) = # of shares needed to DRIP

+ (buffer {say up to 20 shares}) = should be able to DRIP synthetically.

Using ABC Company for a quick example:

(18) / (0.20) = 90 + (20) = 110 shares total.

Assuming ABC share price remains around $18 +/- and assuming the dividend does not change…those 110 shares x $0.20 dividend per share = $22 dividends (which is more than enough to DRIP one (1) whole share of ABC around $18).

Reader: curious, how many stocks are your DRIPping right now?

Good question, I needed to look that up!

I own a number of CDN and U.S. dividend paying stock for income and growth. After your question came in I did my tally. I’m DRIPping at least one (1) whole share from 20 CDN stocks and at least one whole share from my 10 U.S. stocks for a total of 30 synthetic DRIPs running right now primarily inside our TFSAs and RRSPs.

Those DRIPs are helping us grow our dividend income. I write about our income journey using the non-registered account and using our TFSAs specifically via Canadian stocks in the link below. I hope to have another monthly update in a few short weeks now that April is gone…so stay tuned!

March 2020 Dividend Income Update

Happy investing everyone,

Mark