Dividends – A Canadian Dividend Investor’s Dream
As Canadian dividend investors, my wife and I hold a combination of Canadian dividend paying stocks, US dividend paying stocks, and index ETFs in our dividend portfolio. Through this blog, I’d like to demonstrate that it is indeed possible to achieve financial independence through a diversified portfolio consisted of dividend stocks and index ETFs. It is our dream to one day live off dividends.
Table of Contents
- Why dividends?
- Financial Independence
- How much dividends do we need?
- Getting started with dividend investing
- Our dividend investing approach
- Which dividend paying stocks do we own?
- Keeping a simple investing strategy
- Which accounts to hold the different dividend stocks
- Expediting financial independence
- Supplementing dividend income
- Our Dividend Portfolio
- Dividend Income
Why dividends? Because dividend income is very tax-efficient, especially when are living off dividends, and we don’t have any earned income from full-time or part-time work.
If you take a look at our dividend portfolio below, you’ll notice that we invest in both dividend-paying stocks and index ETFs.
We like dividends because of the following simple reasons:
- Our portfolio is working hard for me to generate income so we don’t have to. This is truly passive.
- Dividends are tangible. We can cash deposited in our accounts whenever a company pays dividends.
- We plan to live off dividends, so we don’t have to touch our principals as we plan to pass down our dividend portfolio to future generations and create a long-lasting legacy.
- Before reaching financial independence, we plan to reinvest all the dividends by enrolling in dividend reinvestment plans (DRIP) or reinvest dividends.
- By buying dividend stocks, I am essentially creating my own index fund. The dividend income, therefore, is safer and predictable.
- Canadian dividends are very tax efficient. In fact, by having some good strategies, you can pay almost no tax.
- Dividends allow me to sleep well at night even when the stock market is very volatile.
After many years of investing in dividend-paying stocks and earning dividends, our dividend income can already cover some basic monthly expenses like groceries, car insurance, house insurance, property tax, utilities, and term-life insurance.
I truly believe that living off dividends when we are in our 40’s is possible.
What do I mean by achieving financial independence via dividend and ETF investing?
Simple. Our goal is to earn sufficient dividends to cover our annual expenses. When this happens we can call ourselves financially independent and live off dividends without having to touch the principals. Who knows, maybe we can eventually pass our dividend portfolio to our kids and their kids too!
In case you’re curious about financial independence, here are some articles you can check out:
- What is financial independence?
- The financial independence journey – where do we go from here?
- Financially independent…but we choose not to be
- Why I practice financial independence…and why you should too
- What rock climbing has taught me about financial independence
How much dividends do we need?
Just how much money does our dividend portfolio need to generate before it can cover all of our expenses and we can call ourselves financially independent? Although our dividend income already covers a bulk of our expenses, you’re probably wondering just how much dividends do we need to be financially independent. Do we need $40,000 in dividend income? Do we need $6,000 in dividend income? Or do we need more than $80,000 in dividend income?
Because dividends can be very tax-efficient, based on our annual expenses in the past few years (in 2019 we spent $54,906.02) and some financial independence assumptions, we think we need somewhere around $50,000 and $60,000 in dividend income to cover our expenses. To be on the safe side, I think if our dividend income can generate $60,000 per year, we’d be able to live quite comfortable. If our dividend portfolio can generate more than $60,000 a year, that’s even better and would give us even more margin of safety.
To generate $60,000 a year of dividends, we anticipate we need about a $1.5 million portfolio (market value). Given stock price appreciation dividend growth, and that we’re investing money over time, the actual amount of money invested should hopefully be less than $1.6 million.
And please note, I am not including Canadian government benefits like the Canadian Pension Plan (CPP) and Old Age Security (OAS) in the calculation. I simply see CCP and OAS as the extra gravy (or income) that we may get once we are 65 or older. We also plan to defer the Canadian government benefits to maximize these payment benefits.
Getting started with dividend investing
I started dividend investing by reading books like The Lazy Investor, and Common Stocks and Uncommon Profits. Subsequently, my wife and I became very interested in holding dividend paying stocks. We like the idea of becoming a shareholder of a company that produces products that we’d use on a daily basis. We also like the idea of getting paid regularly via dividends for owning these companies.
Since getting very serious with dividend investing and dividend income in 2011, I have read many invested related books. I have listed some recommended books here.
You can also take a look at a couple FAQ articles I have put together:
Our dividend investing approach
We invest in both Canadian and US dividend paying stocks and index ETFs. We are doing a hybrid invest approach, so we can select and pick dividend stocks that we like and use index ETFs to allow for asset and geographical diversification.
What makes dividend stocks and dividend income so enticing? Here are some of our reasons:
- Our portfolio is working hard for me to generate income so we don’t have to. We’d avoid the need to touch our principals when we are living off our investment portfolio.
- Dividends are real money and not some sort of play or funny money. Dividends are deposited in our accounts and we can use them to cover expenses.
- We plan to pass down our dividend portfolio to future generations and create a long-lasting legacy. So not touching the principals is ideal.
- I like having a predictable dividend income. With ETF distributions, the amounts are hard to predict.
- We can pay no tax or very little of it when we live off dividends because Canadian dividends are very tax efficient.
- By investing in dividend-paying stocks and receiving dividends regularly, I can prevent myself from wanting to sell when the stock market is volatile.
In 2020, our dividend income can already cover basic expenses like:
- Car insurance
- House insurance
- House property tax
- Natural gas & hydro
- Internet and phone
- Term-life insurance
In fact, our dividend portfolio has been generating around $3 per hour in 2020, even when we are sleeping or vacationing. This is really amazing!
Which dividend paying stocks do we own?
We are doing a hybrid investing strategy by investing in a mix of US and Canadian dividend-paying stocks and index ETFs. This allows us to build our own dividend index ETF and utilize index ETFs to increase our asset and geographical diversification.
To build our dividend portfolio, we used methods outlined in this how to start investing in dividend paying stock tutorial. Essentially we purchase US and Canadian dividend-paying stocks that are in the top 10 or 20 holdings of key index ETFs like VCE and VTI. We also take a look at the different sectors and make sure we are sector diversified.
For the most part, we like to own companies that produce items that we’d use on an everyday basis. For example, banks, insurance companies, telecommunication companies, pipeline, utilities, etc. The more reliance we are on the product(s), it means the company has a wider moat. for example, people don’t typically switch their banks, so banks like Royal Bank and TD have a wide moat in terms of keeping their customers. Banks can also easily increase their revenues by increasing monthly service fees. Similarly, people rely on natural gas and must pay the likes of Fortis and Hydro One for house heating.
Keeping a simple investing strategy
Your ego is not your amigo. This is a quote I heard when I first started DIY investing. To be successful with investing and able to beat the indices, one must control their emotion. Therefore, I like to keep a simple investing strategy by following these simple rules:
- Determine a list of dividend paying stocks that we are interested in owning. These include both Canadian and US dividend paying stocks.
- Do as much research as possible to understand the business strategy and model. Determine how these companies make money and stay competitive in their industries.
- Buy these dividend stocks and hold them.
- Whenever possible, enroll in DRIP so dividends can be reinvested.
- For the dividends not used in DRIP to buy additional shares, collect enough dividends then reinvest them.
- Put things on auto-pilot. Avoid panic sales when there’s a market drop.
- Deploy new capitals to buy more dividend-paying stocks
- Collect dividends and reinvest
- Repeat and repeat until we have enough dividend income to cover our expenses
Pretty simple right?
Which accounts to hold the different dividend stocks
For tax efficiency, 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.
- 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.
We don’t hold US dividend-paying stocks to avoid paying the 15% withholding tax. If you hold US dividend-paying stocks in your taxable account, you’ll pay tax at your marginal rate on any US dividends received. Essentially US dividends are treated like interest income which is taxed at the highest tax rate (i.e. your marginal rate). Although you get a foreign tax credit for the amount you received.
Expediting financial independence
Although we estimated that we’d need about $60,000 in dividend income to cover our expenses, we can certainly expedite our financial independence if we reduce our annual expenses. One of the ideas we have is to move somewhere with a lower cost of living than Vancouver. That’s where geo-arbitrage comes in. Essentially we can move to a small Canadian town or South East Asia and reduce our annual cost significantly. As a result, we may only need $40,000 in dividend income to cover our expenses.
Supplementing dividend income
In addition to geoarbitrage, there’s another way we can become financially independent earlier. We would need less than $60,000 in dividend income if we can supplement with other sources of income, like part-time jobs or side hustles.
In other words, we can consider a two stage approach.
- Stage 1: Reduce our annual expenses by living at a lower cost of living area. Or using other sources of income and our dividend income to cover our living expenses.
- Stage 2: Use our dividend income to fully cover our annual expenses.
Our Dividend Portfolio
Our dividend portfolio is listed in the table below.
Please note: All content posted on this blog represents my personal opinions and views and should never be considered as professional advice. I am not a financial professional, and I can buy, sell, or hold any investment at any time.
The dividend stocks that we own fall into the following two categories:
- Dividend growers. These are companies that have increased dividend year after year. Some of the companies on the list have increased their dividends for over 20 years. The yearly dividend increase is significant because this is a way to keep up with inflation.
- High income stocks. These are companies that pay over 5% dividend yield. Most of them have slower dividend growth than dividend growers.
Our portfolio consists a mix of dividend growers and high income stocks. As the value of our dividend portfolio gets bigger, it becomes increasingly more and more difficult to grow our dividend income via fresh capitals. Therefore, over the last few years, we have been putting more focus on dividend grower stocks, so we can grow our dividend income organically.
For those positions that the dividend received is enough to purchase addition share(s), we enroll in synthetic DRIP to maximize the power of compound interest.
We are currently investing in 57 companies and 2 index ETFs.
(Updated July 2020)
In case you’re curious, here is the amount of dividends that we have received over the years.
We receive dividends in both Canadian and US currencies. For simplicity, no currency conversion is performed. In other words, we use a 1:1 USD to CAD exchange rate.
2020 Dividend Income: $13,292.47
- Jan – $2,249.72
- Feb – $1,939.33
- Mar – $2,314.39
- Arp – $2,546.86
- May – $1,850.04
- Jun – $2,392.13
- Jul –
- Aug –
- Sep –
- Nov –
- Dec –
2019 Dividend Income: $23,049.16
- Jan – $1609.41
- Feb – $1,695.76
- Mar – $1,988.43
- Apr – $1,914.01
- May – $1,732.38
- Jun – $2,099.94
- Jul – $2,030.08
- Aug – $1,807.12
- Sep – $2,117.13
- Oct – $2,112.71
- Nov – $1,849.95
- Dec – $2,092.24
2018 Dividend Income: $18,734.29
- Jan – $1,340.83
- Feb – $1,352.06
- Mar – $1,440.82
- Apr – $1,545.42
- May – $1,459.76
- Jun – $1,690.82
- Jul – $1,594.35
- Aug – $1,588.16
- Sep – $1,696.94
- Oct – $1603.63
- Nov – $1586.54
- Dec – $1,834.96
2017 Dividend Income: $14,834.38
- Jan – $1,112.37
- Feb – $1,191.55
- Mar – $1,171.92
- Apr – $1,212.18
- May – $1,199.31
- Jun – 1,269.43
- Jul – $1,282.42
- Aug – $1,276.98
- Sep – $1,282.67
- Oct – $1,310.05
- Nov – $1,247.57
- Dec – $1,277.93
2016 Dividend Income: $12,559.74
- Jan – $852.02
- Feb – $1,004.29
- Mar – $952.77
- Apr – $1,033.73
- May – $1,014.84
- Jun – $1,099.33
- Jul – $1,066.97
- Aug – $1,115.20
- Sep – $1,074.16
- Oct – $1,083.47
- Nov – $1,077.06
- Dec – $1,185.90
2015 Dividend Income: $10,318.02
- Jan – $622.85
- Feb – $867.64
- Mar – $775.53
- Apr – $866.32
- May – $844.52
- Jun – $770.03
- Jul – $975.71
- Aug – $927.24
- Sep – $824.69
- Oct – $947.08
- Nov – $922.68
- Dec – $973.73
2014 Dividend Income: $8,362.30
- Jan – $473.15
- Feb – $628.73
- Mar – $1,069.51 (Wow!!!)
- Apr – $601.90
- May – $756.04
- Jun – $543.36
- Jul – $630.37
- Aug – $842.88
- Sep – $638.54
- Oct – $624.34
- Nov – $827.70
- Dec – $725.78
2007-2013 Dividend Income:
- 2013 Dividends: $5,456.20
- 2012 Dividends: $2,484.37
- 2011 Dividends: $675.21
- 2010 Dividends: $329.79
- 2009 Dividends: $154
- 2008 Dividends: $155
- 2007 Dividends: $54