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!
Mark
Here are my favourite one stop shopping ETF solutions for your low-cost portfolio.
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.
Brian So demystified the underwriting process for life insurance in this comprehensive post.
Reader question of the week (email adapted for site):
Hi there!
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.
Mark
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Happy Investing!
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.
Hey Mark
As always, great blog and great topics. You sure have had a busy life lately.
It’s been a while since I’ve posted but I can never resist commenting on the dividend income vs capital gains argument as it relates to retirees. As always I believe each to his own but I really don’t like people slamming one person’s investment strategy while “pumping” how great there’s is. (way to go Benny boy!!)
All I’ll say is that dividend income/growth investing can work. I’m 66 and have been retired for over 6 years with no company pension. My wife and I live entirely off our dividend income and my CPP & OAS. My wife is 62 and was a stay at home mother so minor CPP and no OAS yet. (she’ll take it immediately once she turns 65).
We are 100% invested in equities (no fixed income/GICs at all) with 25 individual TSX listed dividend payers and 2 ETFs in 5 sectors – banks, utilities, midstream, REITs, and telecom. Our dividend income is way more than double what we need and increasing faster than inflation with dividend increases. We have now built up a large cash wedge so are continuing to dole out an early inheritance to our two kids and their families,
This makes us a very good example of how dividend investing can work.
All the best to all (especially the dividend income/growth investors 🙂
Don
Great to hear from you Don!
I have no problem with the total return folks/arguments. That is very important.
However, I guess where I struggle with some of them/those arguments is not everything is a nail – it’s not the same rules that apply to everyone. Meaning, what if an investor wants 50% stocks and 50% GICs in the latter stages of retirement? They are not focused on total return that is possible but rather, what their income and minimizing their investment risk needs are?
To your point, the whole “investor shaming” as I call it really annoys me but people will do what people will do sadly.
I simply love reading this – since this is aspirational for me:
“My wife and I live entirely off our dividend income and my CPP & OAS.”
“We are 100% invested in equities (no fixed income/GICs at all) with 25 individual TSX listed dividend payers and 2 ETFs in 5 sectors – banks, utilities, midstream, REITs, and telecom. Our dividend income is way more than double what we need and increasing faster than inflation with dividend increases. We have now built up a large cash wedge so are continuing to dole out an early inheritance to our two kids and their families…”
This makes us a very good example of how dividend investing can work. I would say so!!!
🙂
Mark
Thanks on the comments.
I actually preferred a total return strategy when we were in our accumulation phase and transitioned to dividend income/growth as I neared retirement in June 2013. Fortunately for us, that was the year of the interest rate tantrum so dividend stocks can hit really hard making it a perfect time to be buying.
As many have said on your site, the most important thing is for people to have an investment plan/strategy and to try and stick with it. My wife and I are well over the FI hump so it’s really easy to stick to our plan no matter what the markets do – buy, hold, collect dividend income, and totally relax and enjoy our kids, grandkids, and the great outdoors.
Ciao
Don
What a great life! “My wife and I are well over the FI hump so it’s really easy to stick to our plan no matter what the markets do – buy, hold, collect dividend income, and totally relax and enjoy our kids, grandkids, and the great outdoors.”
Keep up the good stuff Don.
Mark
@Mark: re the piece “the math behind when to take CPP”, correct me if I wrong and I missed it, but I didn’t see in the calculations the positive effects on one’s investments (say a TFSA for simplicity) of commencing CPP at age 60. Those gains in the TFSA, even if it’s just 3% on GICs, it moves the crossover point further out. Then there’s the potential benefit of having a lower taxable income when you start drawing your OAS and avoiding some clawback of that. In the event of early death, say at age 68, your estate will be greater because you have more in your investments. Also, as mentioned in one of your blog posts on the subject, there are caps on how much CPP can be added to a surviving spouses CPP. For completeness (and there may well be things I’ve not mentioned), I’ll just throw in that if you retire early, for example at age 58, that’s going to have an impact on the difference between what you would get from CPP at age 65 vs working right up to age 65, should one really wait in such a circumstance – I don’t know. For a couple with work pensions of $40K total, the impact of early CPP on GIS is moot, because the work pension alone takes them well over the income to qualify for GIS.
So, I think there’s a lot more moving parts to be considered than many might think, and many articles on the subject don’t mention at all. Perhaps one day someone will develop an online app that considers all these factors and gives us the definitive answer for our individual circumstances.
Hey Bob,
The link I provided was not a comprehensive post showing all possible math on CPP (there are calculators out there that can help) but I believe, as always, there is benefit in having lower taxable income as long as your expenses are being met.
Regarding the surviving spouse, I do recall there are caps and yes, taking CPP early might have an impact on that.
For you folks, if your pensions are $40k combined, you’re in a great position whereby you probably don’t need CPP for living expenses. Even if you wanted to take it early, that’s totally fine, at least you know some of the pros and cons of that.
Have you tried this?
https://www.canada.ca/en/services/benefits/publicpensions/cpp/retirement-income-calculator.html
Thanks for your detailed comment.
Mark
Happy Labour Day everyone!
I’m in the accumulation phase still, so total return matters most to me. But because of what I have learned on this site, I’ve begun paying more attention to what my CCP portfolio is paying me in dividends that I could live on when I retire. It’s quite exciting to see what used to be trivial amounts now rise to something worthwhile!
Indeed Bart. Whether it’s lazy CCP investing with 3-4 ETFs or a hybrid approach or other, eventually, you’ll need to spend/drawdown what you’ve worked so hard to build up.
Kudos to your efforts.
BartBandy1917, well done. I think that’s a good thing and will serve you well into the future. IMHO, accumulating is one thing and unlocking the cash flow machine is another.
I’m both an indexer (Int/US) and a dividend stock holder (CDN) and retired 5+ yrs. Since finding Mark’s site around that same time I’ve become more aware and appreciative of the benefits of dividends he lists above. In this phase its especially helpful, even though I am planning to utilize capital and I monitor total return as well as dividends and their growth.
Thank you Mark & RBull, I appreciate the kind words – I’ve enjoyed learning from both of you and others who post here.
For the last 7-8 years or so I’ve been following the CCP approach for all my exposures, but I bought and was inspired by Henry’s great book and have done a lot of additional reading. I plan to shift some of my Canadian exposure to dividend growth investing. I may do this initially with new contributions and dividends paid out of my index holdings since I don’t want to trigger a large taxable event right now.
It’s funny – since opening and growing my taxable account in the past 5 years I have become much more mindful of tax issues. I’ve been wary of changing to a strategy that would involve selling last year’s holdings to buy this year’s “better rated” holdings (like MoneySense’s lists which change each year) but I have learned here that you can find high quality, dividend growth companies that can be held for the long term. I also like learning, and this is an intriguing challenge for me.
You’re welcome BB1917. Diversity of investment opinions and strategies is good and I think many of us often learn something from each other, no matter how experienced. For those making some change its probably an evolving process due to to lots of factors like the taxes you mention. I’ve gone through the process you described in unregistered to get to all div growth stocks, and TFSAs where its mostly div growth stocks.
That seems smart to me…. re: any shift via “new contributions and dividends paid out of my index holdings since I don’t want to trigger a large taxable event right now.”
Interestingly enough, since I now have 30 CDN stocks (all DRIPping every month and quarter); my plan is to own more U.S. assets now and buy some low-cost US ETFs to offset any increases in CDN exposure via my dividend reinvestments. The only exception to this is buying more CNR. I hope to buy more in the coming months.
Any stocks you have your eye on? If so, why?
Another interesting thread Mark. I like that you had both sides of the dividends issue presented.
However, I too favour dividends for all the good reasons you listed. Well done with the list. I agree with all 7. Ultimately I care about total return but dividends are a valuable part of that. As a retiree looking to generate cash flow its so simple and cost free to collect dividends vs selling shares, or to reinvest through drips.
Yes, that was a well done article on CPP, OAS & GIS. The years are creeping by and before we know it decision time @ 65 will come here concerning timing for 2 of those benefits.
Indeed Mark on change. That and discipline are tough. Execution is where the rubber hits the road. It is something that many years of marathon training and racing and even now for a half teaches. Time, education, planning, diet, rest, discipline and very demanding mental and physical effort. This old horse is still loving it and grateful the body is letting me back into it!! Saving and investing don’t have the physical part but introduce some other potential behavioural issues like fear and greed.
Yes Lloyd on the motivation part. People must give themselves very powerful reasons to accomplish the goals they actually plan for and truly desire. A dividend plan in accumulation years like Mark is doing seems a smart way to stay disciplined and also provides tangible income evidence as time goes by. The will to succeed is nothing without the will and discipline to prepare. All things it seems the site owner and regular posters on here have learned well.
“Time, education, planning, diet, rest, discipline and very demanding mental and physical effort. This old horse is still loving it and grateful the body is letting me back into it!!”
Good stuff! 🙂
Thanks. You’re up and at it early.
Both of my recent races after a 13 year injury break earned some hardware in my age category, and the woman I am coaching also won hers in the last one. First win in her life!! Feels very good. And the dividends roll on too!
Soon I will be helping vounteer coach our high school cross country team.
Sorry for the digression!
I enjoyed a three year work week for a few years too. It was a good transition to full retirement.
Everyone have a great long weekend.
Ya, blog takes some work even on a long weekend!
Congrats on the volunteer work. That’s great stuff and admirable to give back.
Good for you “working” on the weekend.
My volunteering on that is nothing much. Truly a labour of love that’s rewarding.
I’m getting my local library to bring in Henrys book and am waiting to receive it. I had a look at the questions and my answers were fairly similar to MDJ’s.
My answers will be posted later today. I told Henry I would. He’s been waiting on my for a week! Very similar to MDJs but I knew that because I’m in touch with him quite a bit and our approach (although he has more invested than I do; he owns more individual stocks and ETFs as well) is very similar.
Sounds great.
Headed out to the water soon-high tide. Its starting to cool some and is therapy for my legs.
You have such a meaningful fulfilling enjoyable retirement life! I think I am very close to answers to what to retire on but still need to figure out what to retire to.
If I indeed retired while my kids still in school, the first thing to do is volunteering more at school I guess.
Thank you May. I am fortunate to have a fantastic wife to share time with and who puts up with me! Our home and property is luckily also our cottage vacation paradise.
I could do up a list of things I’ve gotten into or gotten way more involved in but don’t want to bore others.
Nice to read you’re very close to deciding on your retirement goal. I never nearly hit mine but went anyway! I think that’s a smart thing to recognize a person should think about and prepare for just how their time will be spent in retirement to stay fulfilled. I’m sure there are many things you’re interested in for yourself and also places or organizations where you could be highly valued helping others, if you want that. I did some reading on retirement that helped me think about what I wanted to do. I made lists of goals, regular, periodic, seasonal activities, travel bucket list etc. Nothing special but just something to reflect back on. Some things I’ve done, some not and some will be added as time passes. I keep a spreadsheet of our travel destinations, trip length and costs. Kind of interesting. My original bucket list was 26 places and we have done 14 of them so far plus many others that weren’t on there but incredibly special! Need to expand the list!
“I would argue there is effectively no difference between receiving cash dividends and creating your own dividends by selling off some shares.”
I can get 4 dividend payments per year at no cost. I’d have to sell 4 times per year to get the equivalent thus incurring brokerage fees.
I also like the incentive of dividends. Similar to losing weight, a program that motivates a person will likely be more successful. A bad day/week/month on the market can discourage some folks if all they look at is stock prices whereas a nice dividend payment or announced increase in same can take some of the sting out of it. Sometimes, perception is reality.
This is the psychological benefit I speak of Lloyd. The cash rolling in almost hell or high water allows me to stick to a plan I believe in and will follow. With no money management fees, as long as I own many of the stocks the big ETFs own, I am almost guaranteed to have returns similar to those low cost ETFs.
Kudos to your plan. You are obviously doing well yourself!
Ya, I’m sure these guys are absolutely correct in what they say based on their in depth studies and the to the nth degree analysis. But when human foibles are included into the analysis it may become little less precise. I’m sure a nutritionist could come up with the perfect plan to lose weight and get absolutely zero people to strictly abide by it. Every plan needs a motivation factor even if it is to “fool” a person into following it because we kinda know, if you don’t follow the plan it’s not likely to be all that successful.
…and that’s the rub. There is information everywhere about how to eat, what we should grow as a species, how to exercise, what things we can do to keep our minds calm and fit and yet we don’t do nearly any of these things.
Why?
Change is hard. Very hard. And as such, there is only so much change our caveman-like minds and bodies may wish to endure in any lifetime.
I consider having a plan for something as 1/100th of the process. Executing it is a totally different story.
Your commission will be in the mail.
Thanks Mark
LOL.