Last week Reader B, a fellow Canadian shared his amazing dividend investing story with us. B and his wife retired in 2004 at age 55 and have been living off dividends since. What’s amazing is B and his wife started their investment journey with only $10,000. In 36 years he has built a dividend portfolio with a market value of over $8.5M. The dividend portfolio generates $360,000 each year.
That’s $30,000 a month of pure passive income!
What I found extremely impressive is that neither B and his wife had very high salaries. While working they only had slightly above average salaries (B made ~$110kand B’s wife made $90k in today’s money).
Their investment success was built on three important factors – consistency, patience, and a modest lifestyle. In B and his wife’s case, time in the market is definitely more important than timing the market.
Since my wife and I plan to build live off dividends once we are financially independent, I wanted to learn from a fellow investor that’s ahead of us on the financial independence journey. Therefore, I was happy that B allowed me to ask him various questions.
In case you missed last week’s Q&A, please check it out:
Let’s continue with the rest of the Q&A.
Living off dividends – our dividend portfolio
Q10: As a couple you are presently receiving $360K in dividend income annually. Can you elaborate further on how you are generating this level of income? How is your portfolio constructed? What do you own? Do you own a mix of Canadian and international dividend paying stocks?
A: The referenced $360K of income is derived entirely from pure dividend paying stocks and REITs held in our non-registered stock accounts which comprise 85.5% of our total asset value.
My approach to portfolio building adheres to some, but certainly not all, commonly accepted principles of the traditional “model portfolio”. But I feel the approach works, meets our goals, satisfies our comfort level and above all keeps everything as simple as possible. The fewer variables and issues one has to contend with and manage the better.
We’ve constructed a pretty solid buy and hold portfolio which requires only minimal management. We presently own 115 stocks (I know it’s a lot, certainly a lot more than what you and your wife hold in your dividend portfolio) which means that we’ve really constructed a diversified mini-mutual fund in itself, and all with no fees and no MER.
All holdings are all high-quality dividend paying common Canadian stocks. We hold no penny stocks, no US stocks, no ADRs, no ETFs, no preferred shares, and with about 5%-10% in Canadian REITs. We’re firm believers in and committed to dividend stock investing.
Tawcan: You have definitely created your own diversified mini-mutual fund, or mini-ETF. I’m sure we hold similar Canadian dividend stocks in both of our portfolios, probably consisting most if not all of these top Canadian dividend stocks.
The stocks are spread across all sectors with slightly more emphasis for dividend purposes on financials and utilities. The focus is strongly on Canadian dividend aristocrat stocks. We are looking at reducing/realigning several of our REITs holdings because certain REITs are not tax-efficient when held in a non-registered account (but they are efficient if held in a registered account).
Except for the REITs, all stocks pay dividends that are eligible for the Canadian dividend tax credit. This is critical for keeping the dividend income stream as tax-efficient as possible.
Our RRIF and TFSA accounts contain a mix of Canadian index and income mutual funds. I’m not super happy with that arrangement – it’s okay – but the emphasis should really be on Canadian dividend paying and income stocks in registered accounts as well.
Why we only hold Canadian dividend stocks
Q11: If you do not hold any USA or international stocks, ADR’s, ETF’s, then how do you gain international diversification?
A: My approach to holding only Canadian stocks aligns with the keep-it-simple principle and ensuring tax efficiency. Above all, it allows me to focus on the primary goal of developing a tax efficient dividend income stream.
It’s hard enough time-wise for an investor to maintain currency of knowledge in the Canadian stock market, let alone expand one’s reach into the economics and stocks of foreign markets, as well as various types of investment products.
For example, try studying up on the technical details of ETFs and how they work – there are some aspects in the way they operate that I’m not comfortable with. Furthermore, I simply don’t have the time to follow US stocks. And the fact that we don’t own US stocks has, in my opinion, not harmed the performance or safety of our portfolios in the least.
Not holding US stocks (in a non-registered account) solves six problems:
- The Canadian/US currency exchange factor is eliminated. One less variable to have to deal.
- Many US dividends are subject to withholding taxes (I don’t like seeing my dividends reduced).
- Income in the form of USA dollars complicates income tax filings – I don’t need the tracking, reporting and conversion hassles.
- No need to report foreign holdings over $100K to the CRA at income tax time.
- Avoids geo-political risk over which we have no control.
- US dividends are not eligible for the Canadian dividend tax credit – and that fact alone goes directly and mightily against our goal of earning tax-effective dividends.
The way I do achieve international exposure is by holding Canadian stocks that inherently have international exposure build into them (i.e. Canadian companies that conduct business in foreign countries and derive income from international operations). I know the argument will go that I don’t have exposure to big pharma, big retailers, hi-tech and computer stocks, etc. But so what? I don’t need to sample every flavour of ice cream.
Canadian companies that offer safe foreign exposure include ATD.B, CCL.B, WSP, TD, BMO, BNS, POW, RY, MFC, SLF, BAM.A, ENB, PKI, AQN, FTS, TRI, MFC and many more. Many Canadian traded REITs can also be found with foreign property holdings in the US and Europe. These are top quality Canadian stocks – we own them all – and till death do us part.
Tawcan: Some good points there. Given that we’re only talking about non-registered accounts only (i.e. taxable), it makes sense to not hold any US dividend paying stocks for the reasons you mentioned above. However, if we consider other accounts, I think it makes sense in holding US and international stocks and ETFs for diversification reasons.
But you’re right B, many Canadian companies offer safe foregign exposures in the US, Europe, and rest of the world. For example, TD makes a good chunk of their annual revenues from the US market.
Q12: Is the dividend income split roughly equally between your wife and yourself for tax efficiency? If not, why not?
A: Yes our dividend income is close to an equal split. Generally, it is most tax efficient to split income between spouses and we have maintained close to a 50-50 split over the years. The idea with income balancing is to keep both spouses in the lowest possible marginal tax rate bracket. This is also especially important at age 65 when pension income can be split between spouses.
But when both spouses reach the maximum income tax bracket (our situation), then there are no tax efficiencies to be gained at all by splitting or balancing either dividend or pension income. Our dividend producing accounts are not held jointly but individually.
Many couples favour joint accounts which solves the problem of income splitting because for tax purposes you can designate the percentage of the income that goes to each spouse to minimize taxes. Joint accounts, especially when in the high value range, are beneficial in that upon the death of the first spouse all assets automatically become the property of the surviving spouse and provincial estate taxes (probate fees) are totally by-passed – and probate fees can be a huge expense on a sizeable estate.
RRSP early withdrawal strategies
Q13: Do you have an RRSP withdrawal strategy to minimize taxes?
Ha, ha – now you’ve got me going on the subject of RRSPs – so you’ve asked for an earful. Assessing the long-term tax effectiveness of an RRSP is a very complex thing to do – very unreliable – there are just too many variables, assumptions, and long-term forecasts involved.
Withdrawal strategy for RRSPs? Well, yes we do – and we’re not very happy with it – and we can’t do anything about it. RRSPs is one area that I’ve struggled with over the years and I don’t think handled quite as well as possibly I could have – but then hindsight is always perfect, isn’t it?
At age 71, an RRSP must be converted into an annuity or a RRIF or withdrawn in its entirety. Prior to the end of the year in which we turned 71, we had our RRSPs converted to RRIFs.
We both worked until we reached the “Freedom 55” age. In the succeeding years to age 71, we never really had an opportune time or set of circumstances to withdraw our RRSP funds in a tax-effective manner. Now we are forced to make minimum annual RRIF withdrawals each year and pay tax on those withdrawals at our full marginal tax rate – and I’m afraid the CRA has won on this one.
In my opinion, RRSPs and RRIFs have too many conditions, restrictions, and above all long-term assumptions build into them; if those assumptions don’t pan out, one can ultimately be forced to make annual withdrawals that are taxed at maximum rates.
Perhaps I could offer a few words on TFSAs, RRSPs and RRIFs before answering the second part of your question on RRSP withdrawal strategies. The RRSP is a complicated subject area – and their tax-efficiency in my mind is extremely specific to individual/couple circumstances. To make them tax effective definitely requires a long-term plan and the plan has to be implemented.
If you already have an RRSP, then see if it’s possible to withdraw the RRSP funds in a tax-effective way at some point in the future; if not, then at the very least don’t make any further contributions to the RRSP. Instead open up your own non-registered TFDA (Tax Free Dividend Account) – the name we use for our tax-free/living off dividends stock account.
Without question, the TFSA is the most beneficial tax savings vehicle ever made available to Canadians. We should do our utmost to take full advantage of its many benefits – among them tax sheltered growth of both capital gains and dividend income earned within the TFSA. Withdrawals in any amount can be made at any time and are completely tax free.
Unlike an RRSP, withdrawals made from a TFSA can be replaced at a later date. What’s not to like about a TFSA? Well, only one thing – the annual contribution amount to a TFSA is presently capped at $6K per year.
The annual 2021 lifetime contribution limit to a TFSA stands at $75,500 per person – double that to $151,000 for a couple. To the degree possible, one should make the maximum contribution to a TFSA both lifetime and every year – and a TFSA should definitely be the tax saving vehicle of choice ahead of any RRSPs or TFDAs.
I’m not a big fan of RRSPs and if I had to do anything over again it would be to bypass holding RRSPs entirely. But that doesn’t mean that they can’t be used effectively in some situations. Much good guidance can be found on the Internet.
An RRSP works differently than TFSA and comes with a number of long-term assumptions that limit tax-effectiveness as well as what can be some rather severe tax implications on withdrawals. Because an RRSP is a long-term investment, forecasting and scenario calculations can be very difficult and extremely prone to having the underlying assumptions go wrong.
It’s pretty difficult to predict what your situation will be like 35-40 years into the future. A lot can go wrong and circumstances can change that will throw your plans off track. Obtaining tax-efficient cash flow is an important goal and it can be very difficult to achieve with an RRSP. Every retiree’s situation is unique and there is no “out-of-the-box” solution.
You receive a tax deduction for making an RRSP contribution. If your marginal tax rate is 40% and you put $1,000 in your RRSP, your reported income is reduced by $1,000 for the year, effectively saving $400 in tax.
Inside the RRSP, all investment growth is completely sheltered from tax. But all future withdrawals from the account will be taxed at your full marginal rate. It doesn’t matter whether the assets in the RRSP came from interest, dividends or capital gains – they are all taxed at the same full rate!! And because you got a contribution deduction earlier, even your principal is taxed upon withdrawal and often at a higher tax rate than you received for your original deduction!!
RRSPs first became available to Canadians in 1957. Since then, RRSPs have been and still are promoted/marketed on the basic assumption that you will be contributing during your working years when your tax rates are high. And you get a tax deduction based on those supposedly high tax rates at the time of contribution. Then when you “retire”, you will make withdrawals at a supposedly much lower income tax rate – and this is how you’re supposed to come out ahead.
But the prospect of lower tax rates in the future is a huge and often erroneous assumption. Do you really think that your marginal tax rates some 35-40 years in the future will remain at the same levels they are today?
Very, very doubtful.
Governments desire ever-increasing amounts of revenue and over the years tax rates have consistently risen. Taxes never go down. And with the current sad fiscal situation of governments in Canada, tax rates certainly aren’t about to go down anytime soon – they can’t help but continue to increase.
If you have pension or other income in retirement and if you are a dividend growth investor, your income tax bracket is undoubtedly going to be higher in future than during the years when you were working and making your RRSP contributions.
So it’s almost inevitable that you will face higher tax rates when it’s time to make RRSP withdrawals. This makes the RRSP an in-efficient tax saving vehicle when compared to the alternative of investing your dollars in a non-registered dividend income account.
One possible way to make withdrawals from an RRSP tax efficiently would be to plan for a period when all other income stops or is at least reduced significantly. For example, when one retires from work, perhaps pensions (work and CPP) could be deferred for several years – but if you’re a dividend income investor, you can’t just turn off that dividend income stream.
You would have to find an RRSP exit point in which your other income would be nil or at least very low. Then during that period of low income, one could make RRSP withdrawals to the limits of tax efficiency.
For example, in Ontario, a single person with no other income can withdraw $21,500 from an RRSP per year and pay no tax on the income. A couple with no other income can withdraw $43,000 from an RRSP per year and pay no tax at all. Using an approach like this could possibly offer a solution to minimizing tax on RRSP withdrawals. All kinds of variations and combination scenarios could be developed some of which might include minimal amounts from other income sources. But because the options are many and varied, this is where using your computer software package as a scenario tester for tax-efficiency can really prove it’s worth.
Tawcan: You made some very good points. I don’t like how restrictive RRIF is and RRSP can get very complicated too. This is why we plan to make early RRSP withdrawals and probably look into collapsing our RRSP eventually.
Why it’s beneficial to invest dividend stocks in taxable accounts
Q14: Please elaborate what you meant by TFDA (tax-free dividend account) vs. RRSP.
Being a long-term dividend income stream (living off dividends) investor I like to think of our non-registered dividend stock accounts as being another totally tax-free account. I call it the “TFDA” (Tax-Free Dividend Account).
A Ontario couple can make $110,500 in Canadian eligible dividends and pay virtually no tax on that income. If their account achieves a reasonable 5% dividend yield on cost then that would require a portfolio size of $2,200,000 (halve these numbers for a single person). Now, that’s enough investment contribution room to keep most investors going for some time.
The TFDA comes with an abundance of advantages and none of the disadvantages of an RRSP.
- A very high almost unlimited contribution limit
- No penalties for over-contributions
- Totally flexible contribution plan – as much or as little as you want and whenever you wish
- No need to report annual plan contribution amounts to the CRA
- Tax-free growth of unrealized capital gains and streamed dividends (similar to TFSA/ RRSP)
- Option to reinvest dividends
- Make withdrawals of any amount whenever it is tax advantageous to do so
- No withholding taxes on withdrawals
- Withdrawals receive reduced capital gains and eligible dividend tax rates – avoid full taxation
- Contributions (your principal amounts) are never taxed on withdrawal,unlike an RRSP
- No part of a withdrawal is taxed at the full rate since there is nil to little other/interest income
- No mandatory conversion to a RRIF with subsequent forced timed withdrawals of funds
- Never be forced to sell stocks at a specific time
- Continue to hold stocks indefinitely until death do you part (buy and hold)
- Life-time deferral of capital gains tax i.e. never pay capital gains tax for the remainder of your life; capital assets can be transferred tax free (even in non-registered accounts) from a deceased spouse to the surviving spouse
- Enjoy total portfolio management flexibility.
Now what’s not to like about a TFDA compared to an RRSP? Not much. Do you still want to invest in an RRSP?
So your first place to deposit investment dollars should be in the reliable registered TFSA – and the 2nd account of deposit should be your non-registered TFDA.
And those accounts should be maxed out before any consideration is given to an RRSP. Because by the time you build up a TFSA and a TFDA combined portfolio to a value of $2,275,500 – well, you really don’t need an RRSP for the very limited and possibly negative benefits it offers.
That’s why I say ditch the RRSP – it’s more than likely not necessary if you’re following the “living off dividends” income stream strategy.
Tawcan: Hmmm you made some interesting points. My wife and I aim to maximize our TFSAs and RRSPs first before we invest in taxable accounts. Perhaps we need to run some calculations to see if investing in TFSAs and TFDAs first is more tax efficient in the long run. More number crunchings are required.
Q15: How long have you been living off dividends for? Has anything changed since you started living off dividends?
A: I wouldn’t say that we are actually living off our dividend income stream on a day-to-day basis. We have sufficient income from our work related pensions and “forced” RRIF withdrawals to cover most routine day-to-day expenses and taxes.
Most of our after-tax dividend income stream is re-invested in additional dividend paying stocks. It is this re-investment factor coupled with annual increases from dividend aristocrat stocks that have been the primary driving factors increasing both our portfolio value and dividend income stream.
Tawcan: But if you don’t have your pensions and force RRIF withdrawals, your dividend portfolio certainly generates enough money for both of you to live very comfortably.
Yes, things do change and we’re glad we had the foresight to set up a reliable dividend income stream. We retired at the “Freedom 55” age with modest work-related pensions. We deferred our CPP to age 65. Pensions (if you’re lucky enough to have one) provide enough income allowing one to live day-to-day with the basics of life – food, a roof over your head, etc. – but don’t fund very much extra like travel, dining out, new cars, house repairs, etc.
An “indexed” pension certainly helps, but it does not fully keep up with inflation. As a general rule of thumb, about 10 years out from retirement, one begins to notice that monthly pension income is not quite keeping up with the rate of inflation.
This where dividend investing truly pays off. It gives you that secondary income stream which ensures the financial freedom to do the things you really want to do in retirement. So that’s how dividend investing has changed things positively for us – increased financial freedom.
Potential challenges with dividend investing
Q15: How do you see your dividend investment plan evolve from this point? What will be the challenges? Any advice to pass on to those of us pursuing the same goals?
A: My wife and I will continue to carry on with our dividend investing approach indefinitely as we think it remains very sound and workable well into the latter years of one’s life.
Many studies have validated the solid returns that can be achieved with stock and dividend investing over time. We see no need to change anything in that regard. Standard advice says that one should switch to “safe” fixed income investments (i.e. bonds) later in life.
The logic being, I suppose, to “guarantee” a reliable steady income to meet needs and to avoid having to withdraw assets or sell stocks in a market downturn. But then if one is living off dividends these concerns may not necessarily apply. If one’s stocks are generating sufficient dividend income to live on, there should be no need to sell anything.
For me the February to March 2020 market downturn resulting from the Covid pandemic demonstrated the soundness of the dividend investing approach. We sold nothing and just held on and rode through the market downturn and back on up to even higher levels in the ensuing recovery.
The dividend income stream remained remarkably solid and reliable with only a few dividend reductions/eliminations in our portfolio. Stocks that did eliminate dividends were culled immediately and replaced with safe and conservative dividend paying stocks . Many were purchased at bargain prices. But then, so much depends on one’s comfort/risk levels in later life.
We will not be following the traditional financial planning advice which suggests that one should switch to “safer” fixed income type investments in one’s retirement years. Just carry on with time-tested dividend investing that has proven to work.
As investors, we do indeed have to be forward thinking in identifying both life and investment challenges that lie ahead. I can see four major challenges on the horizon.
Challenge 1: One of the most important issues that needs to be addressed by every investor is “succession”. Have you planned for your succession?
Ask yourself this question: “If something were to happen to me today, should I die or become incapacitated, is there a capable someone who can step in with the legal authority to manage my investments and finances? Do they know what has to be done, can they do the job and do they know where to access all the information/files they will need?”
Many people don’t consider this aspect at all or procrastinate on taking action. If you hold everything in joint accounts, then the legal authority issue may be solved – but the management capability issue may not have been addressed.
Everyone should have a will and a Power of Attorney (POA) for property. In fact, the selection of a knowledgeable and capable POA is far, far more important than one’s choice of a will/estate trustee (executor). A POA generally has unlimited power over one’s finances with many decisions to make over what could possibly be years. On the other hand, an estate trustee is bound to act in accordance with instructions contained in the will. Everyone’s situation is different but don’t let this be an oversight.
Nothing wrong with having multiple POAs, but ensure that they are compatible and trustworthy. And always give them the legal power to act “jointly and severally” without the “severally” power, acting effectively as a POA is virtually impossible.
Challenge 2: The Covid pandemic has created not only a health crisis but I believe an impending and long-term world financial crisis as well. And the looming financial issues are likely to have a detrimental effect on those in pursuit of tax-free dividend investing.
Governments around the world, and especially Canada, have rung up massive and unprecedented levels of debt simply by printing and spending “free money” obtained from their central banks. This debt can never be repaid without politically unacceptable cuts to services or drastically increasing taxes.
You simply cannot increase the money supply as is being done now without severe consequences. This will likely take the form of very high levels of inflation. So we can expect greatly increased taxation in future which is going to affect all income types – dividends, earned/interest/other income and capital gains.
Marginal tax rates are going to increase significantly. The capital gains inclusion rate is also going to rise. Governments now tax both income and consumption – a new tax form is about to be launched – the asset tax aka. a wealth tax. Not only will you be taxed on income and consumption, but soon you will be penalized for simply owning something.
Inheritance taxes also loom. Even a tax on the sale of your principal residence is being considered. So there’s no doubt that taxes will soon be on the rise. This is not a favourable prognosis for RRSPs.
Fortunately, for dividend investors, to date, there seems to be absolutely no indication that the Canadian government is considering making any changes to how Canadian eligible dividends are taxed. However, taxes are out of our control. All we can do is try to minimize their impact on our investments and income streams.
Challenge 3: The third issue involves what I refer to as the “Senile Years”. Most investors and investment/financial planners never give the “Senile Years” any thought.
We’re all duped into thinking of those live-happily-ever-after years where we’re shown a photo of a senior couple holding hands and looking off into a beautiful sunset. We’re told that these are the “Retirement Years” or the “Sunset Years” when we’re able to enjoy retirement – we’re healthy, mobile and of sound mind.
For those of us who are fortunate enough to be able to live entirely off tax-free dividends, our “Retirement Years” come early. But no one ever talks about what happens after the “Retirement Years”.
The “Senile Years” are the final stages of our lives when we may not be of sound body and mind and our cognitive powers may have waned. These are the years when one may have to move into a retirement or long-term care home.
If one can remain at home, they may need to hire supportive help/care. Providing for these life changes can be very expensive and often the balanced expense/income budget used in the sunset retirement phase will not suffice here.
Additional funds may be required and planning for this is often overlooked. The case of pension payments can be an especially critical issue. When one spouse dies, the pension amount available to the surviving spouse is often reduced by one half. This can make maintenance of the previous lifestyle impossible – and that’s where planning for a supplementary and supporting dividend income stream comes in to play in a very handy way.
Some people gain the extra funds they need by selling their home. Be sure that you have both a POA for property and a POA for health care who are prepared to step in and assist you as needed. Make sure you can fund the supportive care you will need in your “Senile Years”.
Challenge 4: The fourth challenge involves the transfer of assets and taxation on the death of the first spouse. If assets are held in a joint account, then assets automatically belong to the surviving spouse. Assets in registered plans (RRSPs/RIFFs/TFSAs) will quickly and smoothly be transferred to the surviving spouse provided they have been designated in each plan as being the beneficiary with the right of survivorship.
Also important to note is the fact that a TFSA can be transferred to the surviving spouse along with the deceased contribution room to the year of death.
For non-registered accounts, provided the surviving spouse is named as the beneficiary in the deceased’s will, all capital assets (which include dividend paying stocks) can be transferred tax free “in-kind” to the surviving spouse.
The “in-kind” transfer simply means that no tax is immediately payable on any unrealized capital gains associated with the transferred stocks and that the cost base of the transferred stocks is carried along with them when added to the surviving spouse’s non-registered account.
Don’t let staff at financial institutions tell you that an in-kind transfer from spouse to spouse can’t be done – it can be – insist on it. The deceased spouse’s estate does not have to sell anything (which could trigger a substantial capital gains tax). All can be transferred directly in-kind to the surviving spouse.
But here’s the bad news – upon the death of the 2nd spouse, all assets – including a stock portfolio, TFSAs and RRSPs/RIFFs – are deemed to have been sold on the day of death and full tax is payable on the deceased final T1 tax return on all unrealized capital gains. And that can amount to a huge tax bill.
A TFSA loses it’s tax free status on the day of death and is considered to be collapsed. Fortunately, the entire TFSA assets remain tax-free to the day of death. Spousal and family trusts used to be available to shield/alleviate the amount of tax payable on death but the Canadian government closed those family trust type loop-holes in 2012.
Everyone’s situation is different and it may be advisable to consult with an accountant/tax advisor to see if anything can be done ahead of time to structure one’s dividend stock account holdings so as to ensure a tax-efficient transfer to designated beneficiaries. It remains to be seen what will develop in future in the way of inheritance taxes when passing an estate through to one’s children.
Q17: Any final advice to someone like me who is planning to live off dividends one day?
A: I have two things.
#1. Have patience and faith in your plan. It’s not all going to be smooth sailing. Ride out the downturn storms (i.e. what happened between February to March 2020 due to COVID) by just holding on to your stocks and buying more as you can over the course of the downturn.
In my 36 years of investing, I’ve seen many market downturns, and I must admit that the February to March 2020 Covid induced market downturn was definitely the most gut-wrenching I’ve ever been through. I’ve never seen a market turn down so sharply and so quickly. The volatility was unprecedented and extreme.
But the markets rebounded very quickly afterwards and actually went on to surpass previous highs. View the downturns as a buying opportunity. Do not sell and do not attempt to time the market. No one can time those swings perfectly on a consistent basis. And if you try, you’re likely to be left behind and find yourself unable to buy back in at the most opportune time.
Tawcan: Although we were down by as much as over $250k in late March 2020, we never sold anything. Instead, we moved money around and invested a lot throughout 2020. We invested over $115k throughout 2020.
Did we time the market perfectly and bought stocks at the market bottom? No we didn’t. But market timing doesn’t work. Time in the market is far more important.
Riding through a downturn can be very tough on an investor mentally. Which brings us to a golden investing rule:
The time to buy into a market is when pessimism is at absolute rock bottom – and the time to sell (but only if you really have to) is when optimism is at a peak.
Doing this is extremely difficult on a personal level, especially on the buying side. Covid provides an excellent example. Doom and gloom was all prevailing at the market bottom.
But where is the market bottom if there even is one? Mentally the investor was down too. They’d just lost a ton of money on dropping stock values and now they’ve got to convince themselves to buy more?
Holding on and buying more when pessimism abounds is a very, very hard thing to do mentally. But if you can master the mental aspects of a downturn, you can greatly advance your portfolio value. At the very least, riding out a downturn will keep you from losing money by exiting the market at the wrong time and subsequently failing to get back in.
Everyone can develop some form of a tax-free dividend plan, even if it is only a partial plan. We all have unique personal and financial situations – family, employment status, differing abilities to control expenses and opportunities to save towards a stock dividend investing program. Even if your situation makes it difficult to take the dividend investing approach to its fullest level of being able to live entirely off dividend income, then even a partial plan can prove to be of great benefit.
A dividend investing program at any level can provide much welcomed supplementary tax-free cash flow to help with expenses and gain a degree of financial freedom. And that’s the beautiful part – dividend investment planning is fully adaptable and can be adjusted to suit the abilities, circumstances and comfort levels of everyone who chooses to pursue the “live off dividends” goal.
Q18: Any final comments to wrap up this awesome Q&A?
A: Sure, a few last words.
Some people think that one can only build a large dividend portfolio and become financially independent by having a very high paid job. But that’s not true at all.
I’d say our dividend income success was achieved by working both sides of the income/expense equation. And that is very, very important – just as you stress on your blog. There’s no point in having a decent income going into one pocket if it just goes right out the other.
And you know, Bob, here’s the crux of it. My wife and I have had a great time in life. We’re happy and comfortable. We don’t live a lavish lifestyle but yet we don’t penny pinch either.
We certainly have achieved financial freedom and in the end that’s a super great feeling. We still don’t “waste” money but we’re generous and helpful with others. What I really like at this point is that if we need something, then we can afford it. In the end, that’s a nice feeling. Money does indeed give one freedom of choice.
Tawcan: It’s important to keep a balanced approach. It’s about finding the personal balance between saving for the future while spending money to enjoy the present moment.
I chose to wrap up the Q&A article with a note of encouragement recognizing that everyone may not be as fortunate as we are. We all have differing circumstances in life, varying abilities and income opportunities for setting up a tax-free dividend plan. But even if one can’t develop or take dividend income to the ultimate level, then a partial plan of any type or degree will be of benefit.
Whatever one can do, they should do it!
The end result doesn’t have to reach the full “living off dividends” status. It’s the ultimate goal but not all will be able to attain it. Any level that produces a supplementary income stream is going to help, even if it’s only $1 K per month, it will help out mightily with buying the groceries and other expenses – maybe even dine out a little more often (when Covid’s over, ha!).
Tawcan: I full heartedly agree with you. It’s all about creating a better financial future for you and your family. Who cares about whether one retires early or not? I mean, what exactly means “early?” If the traditional retirement age is 65, if you retire a day before you turn 65, you still “retired early.”
Early retirement doesn’t mean success in life. Rather, I think it’s all about whether you have made an impact in other people’s lives or not.
Living off dividend – Wrapping all up
Wow, thank you B for sharing your amazing story and your knowledge with us. I love how our email exchanges turned into a multi-week-long email discussion and eventually to this lengthy Q&A. This is why I love this community so much – we can all learn from each other and everyone is so willing to share their story and knowledge.
A few years ago, I interviewed other Canadians that have reached financial independence or near financial independence. In case you want to read all their stories, please check out the following interviews.
- FIRE Canada Interview #1 – Vancouver reader J
- FIRE Canada Interview #2 – How I became financially independent at age 32
- FIRE Canada Interview #3 – Why I decided to keep working despite reaching FI at 38
- FIRE Canada Interview #4 – Cash flow is the oxygen of financial independence
- FIRE Canada Interview #5 – Creating a long term plan
- FIRE Canada Interview #6 – Create a net worth statement
- FIRE Canada Interview #7 – Do Absolutely everything and never sacrifice or struggle at all
- FIRE Canada Interview #8 – Building a rental property empire
- FIRE Canada Interview #9 – Relocating to Spain
- FIRE Canada Interview #10 – Kids are as expensive as you let them be
- FIRE Canada Interview #11 – Vancouverites retired in their 30’s
- FIRE Canada Interview #12 – Being a valuist
- FIRE Canada Interview #13 – Always live a rich full life for today
- FIRE Canada Interview #14 – Lifeunscripted
- FIRE Canada Interview #15 – The first million is the hardest
- FIRE Canada Interview #16 – Lean FIRE
- FIRE Canada Interview #17 – Anyone can retire within 20 years
- FIRE Canada Interview #18 – Dividend Powerhouse
- FIRE Canada Interview #19 – Mini-Retirements
- FIRE Canada Interview #20 – Mindful Explorer
- FIRE Canada Interview #21 – $12 Million Net Worth
Dear readers, I hope you have enjoyed this Q&A as much as I did!