Dividend Income & Financial Independence Journey – Aug 2020 Update

I don’t typically write about current events and I have been trying to stay away from politically-related posts on purpose. Lately, however, is it harder and harder to not write about them.

I am deeply saddened by what’s going on in the US lately. Months after the innocent killing of George Floyd and after many Black Lives Matter protests globally, things have not improved at all. The recent incident of Jacob Blake who was shot in the back by the police seven times is the latest example of the social injustice that black people face. A few days after the Blake shooting, a white 17-year-old killed two people and wounded another with a semi-automatic rifle during a protest over the police shooting of Jacob Blake.

Hundreds of years ago, it was common to carry swords in China and Japan. But you don’t see people walking around with swords in these countries anymore.

So why is it OK that carrying a gun is still OK?

Sure, it’s the constitutional right.

But..

Do we still live in the wild wild west where we have to protect ourselves from outlaws and bandits every day?

Given what’s going on in the world, it is hard to sit down and write about personal finance, money, and financial independence.

If you’re reading this, I strongly encourage you to learn more about discrimination and prevent and stop this terrible act. Help to change and improve this world!

Now, if you decide to unfollow this blog or unsubscribe to the email list because of what I wrote. So be it. If you think discrimination is OK, I’m sorry. For the betterment of yourself, I truly hope you can get educated and change your view.

Dividend Income

Back to the main topic of this post… dividend income. In August 2020 we received dividends from the following companies:

• Apple (AAPL)
• AbbVie (ABBV)
• Brookfield Renewable Corporation (BEPC/BEPC.TO)
• Bank of Montreal (BMO.TO)
• Costco (COST)
• Dream Office REIT (D.UN)
• Dream Industrial REIT (DIR.UN)
• Emera (EMA.TO)
• European Residential REIT (ERE.UN)
• Granite REIT (GRT.UN)
• H&R REIT (HR.UN)
• Inter Pipeline (IPL.TO)
• KEG Income Trust (KEG.UN)
• National Bank (NA.TO)
• Omega Healthcare (OHI)
• Procter & Gamble (PG)
• RioCan REIT (REI.UN)
• Royal Bank (RY.TO)
• Starbucks (SBUX)
• SmartCentres REIT (SMR.UN)
• AT&T (T)
• Verizon (VZ)

With 22 cheques deposited in our investment accounts, these cheques added to $1802.33, the lowest amount we have received so far in 2020. Typically February, May, August, and November are our weakest months in terms of dividend income, so it wasn’t a surprise to see our monthly dividend income to be below $2,000.

The August dividend income was a bit lower than the previous quarter (i.e. May) mostly because we had closed out our position in Laurentian Bank.

For those sharp-eyed readers, you probably wondered how we received dividends from Brookfield Renewable when the dividend payment is in September. Recently, Brookfield Renewable went through a merger with Terraform Power. The merger created one of the largest renewable platforms globally. Brookfield Renewable then did a stock split and created a new entity called Brookfield Renewable Corporation (BEPC), which is more tax efficient. With the stock split, each BEP unitholder received one share of BEPC for every four BEP units held. Because our shares did not divide evenly, we received some cash as a result. I figured I would count the cash as dividend distributions.

Of the $1802.33 dividends received, $432.48 was in USD and $1,369.85 was in CAD. Or about a 25-75 split. Long time readers would know that we did not convert USD to CAD when reporting our dividend income. Instead, we used a 1 to 1 currency rate approach. Why? Because we wanted to avoid fluctuations in dividend income over time due to changes in the exchange rate.

Curious about our dividend approach and our dividend investing strategy? Check out our dividends page.

The top five dividend payouts for August came from Bank of Montreal, Emera, National Bank, Royal Bank, and Omega Healthcare (not in order). The top five dividend payers contributed $1,187.32 in dividends toward our August dividend income or 65.9%.

Dividend Growth

We saw a -0.26% YoY growth compared to August 2019. This was the first negative YoY growth since 2011. Needless to say, we were very disappointed.

Considering that we closed out Laurentian Bank and re-invested the money elsewhere, we were expecting this subpar YoY growth. We used to receive ~$100 in dividends from Laurentian Bank. It was comforting to see that we almost made up the difference after only one quarter.

If we compared the total dividends received to date between 2020 and 2019, we saw a 17.5% YoY growth. With four more months to go, it would be great if we could continue to see the overall YoY growth to be above 17.5%.

Dividend Income – Account Breakdown

Our dividend investing goal is to be as tax efficient as possible. To do so, we hold Canadian dividend paying stocks in RRSPs, TFSAs and regular accounts. All REITs and income trusts are held in TFSAs for tax efficiency purposes. All US dividend paying stocks and ADRs are held in RRSPs to take advantage of the tax treaty between Canada and the USA.

To summarize:

• TFSA: Good for Canadian dividend paying stocks, REITs, and income trusts.
• RRSP: Good for US dividend paying stocks, REITs, and income trusts.
• Taxable: Good for Canadian dividend paying stocks that pay eligible dividends.

Why are TFSA and RRSP great vehicles for retirement savings? Check out the following guides:

• The Ultimate TFSA Guide
• The Ultimate RRSP guide

Here’s our August dividend income breakdown:

• Taxable: $470.25
• RRSP: $836.96
• TFSA: $495.12

Dividend Stock Transaction

Although we have added over $70,000 to our dividend portfolio in 1H 2020, we will be slowing down our purchases for the remainder of 2020. Usually, we contribute to our TFSA in early January to max out the annual contribution limits. We also try to max out our RRSP contribution limits by around April. Once our TFSAs and RRSPs are maxed out, we then start contributing to our taxable accounts.

As a result, the majority of our dividend stock transactions happen in the first half of the year. In the second half, we try to continue adding cash to our investment accounts but our focus shifts to saving money for next year’s TFSA and RRSP contributions.

With that in mind, we purchased 18 shares of Bank of Nova Scotia at $56.95 per share in August. This transaction added $64.80 toward our annual dividend income.

Dividend Reinvestment Plan (DRIP)

As dividend growth investors, our goal is to live off dividends when we are financially independent. To do so, we need to make sure our dividend income can keep up with inflation.

Since we are still in the accumulation phase, the key driver for our dividend growth comes in the form of purchasing more dividend paying stocks with new capitals. As the value of our dividend portfolio grows and the amount of dividend income increases, it becomes harder and harder to generate more dividend income by adding new capital alone.

Therefore, it is important to rely on the two other important methods to grow our dividend income.

The other two methods are organic dividend growth and dividend reinvestment plan (DRIP). While we can’t control how much companies raise their dividend payouts (i.e. organic dividend growth), we can control whether we reinvest dividends or not. To keep things simple, one of our dividend growth investing strategies is to enroll in DRIP whenever we are eligible. This means when we purchase dividend paying stocks, our goal is to eventually hold enough shares so the dividend amount is greater than the stock share price.

For those of you that aren’t familiar with DRIP, there are two types of DRIP – full DRIP and synthetic DRIP.

Full DRIP means you can purchase fractional shares. To set up a full DRIP, you need to use the company’s designated transfer agent. Enroll in full DRIP requires you to follow a long process by getting a share certificate as the first step. After a bit of research, we did find one Canadian broker, ShareOwner, allows for DRIPing fractional shares. This was the key reason why we set up our kids’ dividend portfolio with ShareOwner.

With synthetic DRIP, you can only purchase full shares. Synthetic DRIP is what discount brokers like TD, Questrade, RBC, Interactive Brokers, etc, offer.

To entice shareholders, some companies offer DRIP discounts. For example, CIBC offers a 2% DRIP discount and European Residential REIT offers a 5% DRIP discount. It is important to note that not every discount broker honours the DRIP discount. For example, if you enroll in DRIP with TD, you will get the DRIP discount. If you enroll in DRIP with Questrade, you won’t get the DRIP discount.

If a discount broker honours the DRIP discount, it can take up to two weeks before the dividend payment and the DRIPed share(s) show up in your account. Many new dividend growth investors do not know this detail and they often freak out because they have not received their dividends on the dividend payment date.

In August, we were able to DRIP the following stocks:

• 1 share of Bank of Montreal
• 1 share of Dream Office REIT
• 1 share of Dream Industrial REIT
• 1 share of Emera
• 1 share of European Residential REIT
• 3 shares of H&R REIT
• 3 shares of Inter Pipeline
• 2 shares of National Bank
• 4 shares of Omega Healthcare
• 3 shares of RioCan REIT
• 4 shares of Royal Bank
• 2 shares of SmartCentre REIT
• 2 shares of AT&T

These 28 shares added up to $1,010.91, resulting a DRIP ratio of 56.1%. By dripping additional shares, we increased our forward dividend income by $57.92, or an equivalent of 5.72% dividend yield.

Financial Independence Journey Update

At the beginning of this year, I set a goal of having a 55% dividend income to expenses ratio. I picked 55% because we have been spent around $55,000 annually and I thought we could receive $30,000 in dividend income. After staying at home mostly and working from home for more than five months, I have realized that this year’s annual expenses should be much lower than $55,000. This should help us in hitting the 55% ratio given many companies have reduced dividends.

At $1,802.33, our August dividend income covered the following expenses:

• House insurance
• Car insurance
• Life insurance
• Groceries
• Household items
• Car gas
• Phone & internet
• Natural gas
• Hydro
• Charity donations

In August, we spent more than the previous months. The higher spending in August was mostly caused by the pre-school payment, credit card annual fees, and chocolate and chocolate mould purchases (for Mrs. T’s Christmas chocolate production).

Despite a higher expense month, August dividend income was able to cover 42.1% of total expenses. Living off dividends in the future is definitely achievable in the near future.

Summary

After eight months we have received a total of $17,477.37 in dividend income. This is an equivalent of $2,184.67 per month. We are extremely grateful for building up our dividend portfolio so our money can work hard for us. Given what’s going on in the world, we feel very fortunate that we live in Canada. We are extremely grateful and appreciative of not having to worry about things like health insurance and being treated unfairly because of our skin colours.

More than ever, we are more and more conscious of where we purchase things and how we are spending our money. Given the global pandemic, we are buying more local to support local businesses. We have donated money to charities that promote social equality.

Despite our dream of becoming financially independent and living off our dividend income one day, I want this world to be a better place. I want my kids to treat everyone equally regardless what their skin colour, gender, sexual orientation, religion, disability, age, etc. The best way to teach my kids is to show them through my own actions. We must improve and evolve as a society. We can’t continue making the same mistakes. Let’s all be better!