Weekend Reading – Ways to get retirement ready, your ever growing income, return of capital considerations and more #moneystuff
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.
Earlier this week, I wrote about 10 ways I intend to get retirement ready. My wife and I hope to work on our own terms in the coming 5-10 years, so I think it’s time we started to mull this stuff over. Have a look at those 10 preparation points and let me know your thoughts in a comment. I read every one!
Have a great long weekend and see you here next week!
Henry Mah wrote some questions about an income strategy. I recently took his quiz and I intend to post my answers in the coming days – so stay tuned!
Other bloggers answered his quiz of late:
Jon Chevreau offered some cautionary tales for folks who might aspire to use dividend income in retirement. He quoted a number of professional advisors who favoured a total return approach (via indexed ETFs) instead of a dividend paying stocks.
Highlighted in the article is the perspective of total-return fan, PWL Capital portfolio manager Benjamin Felix, who shared his take in a recent Q&A column.
Ben argues dividend investing is “one of the most romanticized ideas in personal finance”—citing a 2013 study by Dimensional Fund Advisors (DFA) that found 60% of U.S. stocks and 40% of international stocks don’t pay dividends, plus the fact that Warren Buffett declared dividends should not matter in making great investments.”
Ben: “I would argue there is effectively no difference between receiving cash dividends and creating your own dividends by selling off some shares.”
Valid points – but let’s acknowledge Buffett does in fact own a number of dividend paying stocks in his Berkshire portfolio and got very rich because of it over the decades – thanks to a combination of dividends and growth from these companies.
On that note, I am with Ben and he knows this – corporations can and do return value to shareholders in many ways: through paying dividends and/or through share buybacks and/or via paying down debt and/or with capital gains.
For me, the key reasons why I love dividends:
- It can (and will) provide some passive income for life (check out my dividend income progress – more than ½ way to my goal of earning $30,000 per year from some key accounts).
- It helps my psychologically for a buy and hold approach regardless of what the stock market does. I know Ben supports whatever helps keep an investor stay invested, that’s a good thing.
- I can reinvest the dividends paid to buy more shares, commission-free, without paying any money management fees to do so. More shares owned will payout more dividends next time. Read up on DRIPs here.
- I save on money management fees by owning the same stocks that the big funds own (unlike mutual funds or ETFs where I pay a money management fee).
- Canadian dividends are very tax-efficient in a non-registered account. This makes this account a great home to own them in long-term while I fill up my RRSP with U.S. assets. U.S. assets diversify my portfolio beyond Canada’s oligopoly borders.
- I believe living off dividends can help reduce any worries about when to sell stock shares in any down market. I can simply take the dividends as cash and live off that.
- It’s a great complement to my buy and hold ETFs approach for long-term growth. You can read about my favourite, best, low-cost ETFs to ride market returns here.
A solid post about making the most out of GIS and CPP benefits. From the article:
“Even if you are not targeting receipt of the GIS benefit, arranging your retirement income to defer CPP benefits until age 70 removes a significant amount of both investment return risk as well as longevity risk, as a larger portion of your later retirement years will be covered by safe, guaranteed, inflation-protected government benefits.”
This aligns with my own DIY thinking on this subject – if have decent health and ample personal assets, draw those down first and defer CPP for as long as you can. Here is the math behind when to take CPP.
Reader question of the week (email adapted for site):
I recently subscribed and am looking forward to the postings. One quick question I have is whether or not there’s a ROC – Return of Capital component on the BMO ZWC ETF and what that might be? Where would I find that information?
Also, do you have any advice on ETFs that pays out a monthly dividend/distribution that consist of a ROC to maintain its distribution?
Thanks for any insights.
More great questions.
For what it’s worth, I always go to the source when trying to find investment information. That means, if you own a BMO ETF, check out BMO’s friendly site and learn more about ZWC right there.
In this case, looking up ZWC in their search bar, I found the following for 2018 as an example:
Some reminders about ROC:
- Return of Capital (ROC) represents the portion of a distribution that does not consist of dividends, interest or realized capital gains.
- It may or may not mean you are getting “your own money back” but I can appreciate some investors see it this way. In essence, ROC can reflect unrealized capital gains because the assets have risen in value.
In terms of any advice on ETFs that pay out a monthly dividend/distribution that consist of a ROC to maintain its distribution I don’t know any off the top without some detailed research. Furthermore, I would need to read a fund’s prospectus and/or talk to the money manager to confirm that information – I wouldn’t want to make assumptions.
Thanks for your question and being a fan of the site.
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