# Living off of $50k/$100k in Canadian dividends for early retirement?



## milhouse

There's been a number of articles discussing earning up to around $50k of dividends tax free* (*with no other income and province dependent) per person yielded from Canadian equities. A few that have resonated with me around trying to achieve this goal for a core income stream in retirement have been:

Jonathan Chevreau wrote about it on his Findependence website and Financial Post. 

John Heinzl has written about it in the G&M.

Jason Heath has written about why it may potentially be a mistake living off of dividends in retirement.

What do you think about this strategy for a core income stream in retirement? It's obviously situational dependent with tax implications and such. There's also obviously risks around having so much of your nest egg allocated to Canadian equities. 
Is anyone out there in retirement hitting $50k in dividends? If so, how is it working out for you from various perspectives: like peace of mind, taxation, gross-up impacting OAS & other means tested benefits, etc.


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## kelaa

I doubt you will find very many here who has reached that point via dividend income and sharing their thoughts. I do think the absolute numbers of those people are not that high. And I would suspect once you have a ball park million in stocks, you'll feel less inclined to browse this forum. Now if you count real estate income, there may be quite a bit more.

As far as internet Canadians at large, I believe Susan P Brunner is largely living off her dividends. Tawcan and MyOwnAdvisor are maybe 1/3 of the way there in terms of dividend income. Millennial Revolution is there in terms of assets, but they don't structure it for dividends. 

Personally, if I were to reach that point, I would consider a cash buffer important for a peace of mind. 

For many people who are still years out, as the value of TFSA accounts increase, that'll provide a good shelter for their income. For example, the combined TFSA size as a couple will be approaching a million dollars in twenty years. That'll for instance completely shield about half of your income from any tax or clawbacks. Even in early retirement mode, you can still increase your TFSA via shrinking your taxable or RRSP accounts. If you keep growing it thirty years or so, I model it being close to covering all baseline income requirements.


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## AltaRed

milhouse said:


> What do you think about this strategy for a core income stream in retirement? It's obviously situational dependent with tax implications and such. There's also obviously risks around having so much of your nest egg allocated to Canadian equities.
> Is anyone out there in retirement hitting $50k in dividends? If so, how is it working out for you from various perspectives: like peace of mind, taxation, gross-up impacting OAS & other means tested benefits, etc.


That strategy is way too concentrated if focused solely on Canadian eligible dividends only. Given some risk of a Canadian economic 'black swan' from an Ottawa fumble on the economy, the loonie could dive and inflation could roar as a result of suddenly expensive imports. That won't do much for purchasing power in such an event, never mind a likely dip in dividend income stream from some corporations. 

Also, remember there is not much difference in taxation rates, and thus AT income, between $100k in dividends and capital gains. Consider Total Return in all investments and crystallize some of that cap gains along the way.

I have over $50k in investment income per year, but it is all types. A good portion of it is indeed Canadian eligible dividends, but a good part of it is also Other Income from ex-Canadian equities, and some of it is realized cap gains. A fairly small part of my investment income is in plain old interest and tax deferred ROC. Asset allocation and diversification must still feature prominently in a portfolio....even if the core, e.g. 50%, is Canadian eligible dividends.


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## FrugalTrader

We are just past the $28k dividend income mark, and indeed, we plan to use dividends to fund early retirement. How early is the real question and yet to be determined.  Here is my latest update: http://www.milliondollarjourney.com/financial-freedom-update-q2-june-2017-9-73.htm


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## tygrus

Most people who have a million or could get a million didnt get it from the stock market and therefore wont put it back in there. Thats the simple truth. Why are there only a few hundred thousand people with a million in the market when there are hundreds of thousands of people with a million in wealth in the country?


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## 1980z28

I have retired on may 26 2017,@ 56,,,,my dividend income is appox 3120 per month,for my expenses it is way more than i need,,,just another few years to get my only pension CPP
Still sitting on cash in non reg account,will buy more dividend stock


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## AltaRed

tygrus said:


> Most people who have a million or could get a million didnt get it from the stock market and therefore wont put it back in there. Thats the simple truth. Why are there only a few hundred thousand people with a million in the market when there are hundreds of thousands of people with a million in wealth in the country?


Many of those in the latter group might be GTA or Vancouver home owners. Speaking for myself, I have more money tied up in equity markets than my home is worth.


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## 1980z28

I am in the same boat,sold my house in ontario recently,only home now is retirement home,the weather here for the last month has been great,getting some fresh caplin today,they are rolling in,,also neighbours drop of a couple live lobsters,now in pot with ocean water ,,hopping not to salty,,nice to be back home


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## milhouse

kelaa said:


> As far as internet Canadians at large, I believe Susan P Brunner is largely living off her dividends. Tawcan and MyOwnAdvisor are maybe 1/3 of the way there in terms of dividend income. Millennial Revolution is there in terms of assets, but they don't structure it for dividends.
> 
> Personally, if I were to reach that point, I would consider a cash buffer important for a peace of mind.
> 
> For many people who are still years out, as the value of TFSA accounts increase, that'll provide a good shelter for their income. For example, the combined TFSA size as a couple will be approaching a million dollars in twenty years. That'll for instance completely shield about half of your income from any tax or clawbacks. Even in early retirement mode, you can still increase your TFSA via shrinking your taxable or RRSP accounts. If you keep growing it thirty years or so, I model it being close to covering all baseline income requirements.


You just reminded me of Tawcan's profile story I came on MoneySense. I've come across SPB, MOA, (and MR's) blogs too. Someone had compiled a list of finance bloggers and how much dividends they were churning out. 

I'm not sure how I'm going to use my TFSA strategically from an overall plan perspective. I'm just contributing yearly and letting it grow for now. 



AltaRed said:


> That strategy is way too concentrated if focused solely on Canadian eligible dividends only. Given some risk of a Canadian economic 'black swan' from an Ottawa fumble on the economy, the loonie could dive and inflation could roar as a result of suddenly expensive imports. That won't do much for purchasing power in such an event, never mind a likely dip in dividend income stream from some corporations.


I'm also concerned about the risk. One way I'm trying to provide a bit more balance is that my RRSP, DC pension, and TFSA holds very limited Canadian content whereas my non-registered accounts hold primarily Canadian dividend growth stocks. 
Part of the issue is that I've grown my non-registered holding via my employer's stock purchase plan and stock options and I've broken the rule that says you shouldn't hold too much of your company's stock because if the company encounters trouble and its share price tumbles and you end up losing your job, you're kind of screwed. 



FrugalTrader said:


> We are just past the $28k dividend income mark, and indeed, we plan to use dividends to fund early retirement. How early is the real question and yet to be determined.  Here is my latest update: http://www.milliondollarjourney.com/financial-freedom-update-q2-june-2017-9-73.htm


Ahh, didn't realize FT = MDJ.com blog. I enjoy your blog. Congrats on hitting your original goal so fricken fast. :smile:



tygrus said:


> Most people who have a million or could get a million didnt get it from the stock market and therefore wont put it back in there. Thats the simple truth. Why are there only a few hundred thousand people with a million in the market when there are hundreds of thousands of people with a million in wealth in the country?


I'm not sure if I get your point. I'm guessing a lot of overall wealth nowadays is from RE. 



1980z28 said:


> I have retired on may 26 2017,@ 56,,,,my dividend income is appox 3120 per month,for my expenses it is way more than i need,,,just another few years to get my only pension CPP
> Still sitting on cash in non reg account,will buy more dividend stock


That's excellent. It sounds like the dividend income is working out for you in retirement so far. Would love to hear additional feedback as your retirement progresses.


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## tygrus

milhouse said:


> I'm not sure if I get your point. I'm guessing a lot of overall wealth nowadays is from RE.


The markets have always had this belief that the average guy will eventually sell his home or business or take his savings and put it all in the market. My experience is thats the last place people will put their money. They would rather draw it down or invest it in a GIC or annuity or other investment than let the market eat it. 

There are tons of millionaires around me that would never put a dime in the equity market.


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## like_to_retire

tygrus said:


> Most people who have a million or could get a million didn't get it from the stock market and therefore won't put it back in there. That's the simple truth. Why are there only a few hundred thousand people with a million in the market when there are hundreds of thousands of people with a million in wealth in the country?


I don't really agree with this. First, a million just ain't that much any more. I got mine from saving and the stock market. I know lots of people who have. Where is this idea coming from?



AltaRed said:


> Speaking for myself, I have more money tied up in equity markets than my home is worth.


Same here. It ain't that unusual, and that is "_the simple truth_".



tygrus said:


> There are tons of millionaires around me that would never put a dime in the equity market.


Strange.

ltr


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## canew90

We've hit the $100k in dividends from our investments but the problem is that 60% of our investments are in our rrif's. So the withdrawals are 100% taxable at the highest rate. The dividends we must claim from our non-reg accts get added on top of that, as well as cpp & oas. So with the 1.38 Gross Up our dividends gets to the max of being a clawback for oas. The dividends don't get taxed as high but we do get taxed on them. 

Is it a problem, not really as we don't need all our dividends so 60% get reinvested, generating more income. If I had to do it all over again, I'd had started sooner with DG investing. The tfsa will help many today but one will still have to use the rrsp to get the max tax benefits. The key IMO is to stick to solid companies, avoid cyclicals, don't chase yield, don't over diversify or worry about asset allocation and reinvest the dividends.


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## like_to_retire

canew90 said:


> We've hit the $100k in dividends from our investments but the problem is that 60% of our investments are in our rrif's. So the withdrawals are 100% taxable at the highest rate. The dividends we must claim from our non-reg accts get added on top of that, as well as cpp & oas. So with the 1.38 Gross Up our dividends gets to the max of being a clawback for oas. The dividends don't get taxed as high but we do get taxed on them.
> 
> Is it a problem, not really as we don't need all our dividends so 60% get reinvested, generating more income. If I had to do it all over again, I'd had started sooner with DG investing. The tfsa will help many today but one will still have to use the rrsp to get the max tax benefits. The key IMO is to stick to solid companies, avoid cyclicals, don't chase yield, don't over diversify or worry about asset allocation and reinvest the dividends.


Yeah, the gross-up is a bugger, but if you do the math, dividends still offer a better after tax return than interest income, even with the OAS recovery tax.

I'm lucky, in that I re-invest 100% of my dividends, as my pensions cover all my expenses, so the magic of compounding is running full force.

ltr


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## tygrus

like_to_retire said:


> I don't really agree with this. First, a million just ain't that much any more. I got mine from saving and the stock market. I know lots of people who have. Where is this idea coming from?
> ltr


Look whats the Tiger 21 people do if you want a window on HNW. It aint the stock market, much more tied in RE, Private Equity, Venture Capital and businesses.


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## like_to_retire

tygrus said:


> Look whats the Tiger 21 people do if you want a window on HNW. It aint the stock market, much more tied in RE, Private Equity, Venture Capital and businesses.


I think you'll find that Tiger 21 people have a minimum net worth tuition of 10 million. That's a different world than the scrappy, claw their way to a few million, investor types that inhabit investor forums like this. A couple million is a long way from the member attitudes of Tiger 21.

ltr


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## AltaRed

tygrus said:


> Look whats the Tiger 21 people do if you want a window on HNW. It aint the stock market, much more tied in RE, Private Equity, Venture Capital and businesses.


But you are talking about the "really" high net worth folks. There are a lot of folks in the $1-5 million range folks that are likely in both capital markets AND other ventures. Including some members here.


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## OnlyMyOpinion

We "in effect" live off of unreg acc dividends at the high end of the suggested range. I say in effect because they are drip'd and we actually spend the equivalent amount as fixed income strips mature. I think you either have a low enough income that you get OAS and don't worry about clawback, or you are in that middle ground which I would find a pain in the a$$ to try to optimize to minimize clawback, or you are well above clawback and don't fuss the lack of OAS. 

I'm surprised to learn that multi-millionaires are as CMF and equity-adverse as suggested.


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## Mechanic

Over 50k in divs here too from reg and unreg. Some dripping but all stays in account while we live off reserves, interest, etc. Going to get CPP soon, just over 60, been retired 5+ yrs already


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## tygrus

The number of retail investors - the kind that have a few hundred to a mill or so - has been dropping steadily for a long time. Hence the lower volumes on the exchanges. Markets are moving higher on thinner trading and fewer participants.


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## AltaRed

Source of that assertion? My view would be there are more retail investors than ever due to digital platforms, but that more of them have fled from full service and have gone couch potato with bank funds and ETFs.


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## gibor365

We should hit 40K in dividends and interest this year. It consists from Canadian ,ex-Canada, US dividends and GIC/HISA interests. Portion of dividends are in LIRAs/RRSPs. We own fully paid house in GTA worth 700-800K.
I'm just over 50, semi-retired for 10 months  (even though got severance for about 9 months). My wife is 41 and still working, trying to convince her to retire in several years : ) or at least to switch to contract job (when she's bored) . Next years, I'm planning to convert my ind RRSP and SRRSP to RRIFs and withdraw RRIFs minimum (my wife still can continue contributing to my SRRSP). Thus I won;t be paying any taxeson RRIFs withdravls and my wife will get more than 50% back from her contributions (she's in the highest possible tax bracket). Our total assests (excluding home) is about 1.4M + our daughter RESP (she's grade 11)


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## gibor365

AltaRed said:


> Source of that assertion? My view would be there are more retail investors than ever due to digital platforms, but that more of them have fled from full service and have gone couch potato with bank funds and ETFs.


I've heard opinion that because more and more investors are switching to index ETFs, liquidity of those ETFs is going down.


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## hboy54

tygrus said:


> Most people who have a million or could get a million didnt get it from the stock market and therefore wont put it back in there. Thats the simple truth. Why are there only a few hundred thousand people with a million in the market when there are hundreds of thousands of people with a million in wealth in the country?


I think it is quite likely that there are more RE millionaires than stock millionaires these days, but that is more a comment on Vancouver and Toronto RE not stock investing. How that leads to them not putting (or putting for that matter) some of it in stocks one day eludes me, I see no cause and effect here either way.

Personally, stocks have worked extremely well. RE by way of personal residence and 4 or 5 years of one of the residences being a rental has done nothing for me in a 1/3 century because I was never lucky enough to live in Toronto or Vancouver. I don't do FI because it is a lower expected value asset class and I am trying to maximize wealth without care to volatility, so that leads me to stocks exclusively.

Regarding OP topic, current dividend income in all accounts for me and my wife is $66K, or about $50K after margin interest costs. We also have capital gains and/or RRSP withdrawals every year too. Plus my wife's pension will commence next year too. She has stopped working via a leave of absence and with official retirement almost certain for next year. I am 54 and have not worked since about 39, she is 51.

hboy54


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## gibor365

> We also have capital gains and/or RRSP withdrawals every year too.


 Just curious why you are not switching to RRIF


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## milhouse

gibor365 said:


> Just curious why you are not switching to RRIF


I don't think there's value in migrating investments from an RRSP to a RRIF under age 65 is there, since you lose flexibility (ie forced withdrawals) and cannot claim the Pension Income Tax Credit from RRIF income until 65??


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## milhouse

hboy54 said:


> Regarding OP topic, current dividend income in all accounts for me and my wife is $66K, or about $50K after margin interest costs. We also have capital gains and/or RRSP withdrawals every year too. Plus my wife's pension will commence next year too. She has stopped working via a leave of absence and with official retirement almost certain for next year. I am 54 and have not worked since about 39, she is 51.
> 
> hboy54


Any comment/thoughts around whether dividend growth or overall portfolio growth or a combo of the two or something else was the biggest factor in sustaining, if not growing your retirement income and lifestyle over the last 15 years, particularly with the hit in 2008/2009?


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## My Own Advisor

Cannew has a great problem to have in retirement  A tax problem with $100K in dividends.

Kidding aside he has done very, very well on the investing front. Most of us will not "get there".

I just updated my income journey this am. 
http://www.myownadvisor.ca/june-2017-dividend-income-update/

Like AR mentioned, I think one has to caution against focusing too much on CDN content. While CDN dividends are great, there is a HUGE world out there and you need to invest in it to maximize returns. So, consider using the RRSP for all U.S. and international content. Otherwise, yes, my bias is using the TFSA and non-reg. accounts for CDN stocks that reward shareholders via dividends.

We're almost halfway to the big goal of $30K but if you include other assets (U.S.) we're much closer to that amount. 

As we get older, I will likely invest MORE outside Canada than in. I need more diversification as I age to fight some early-on home bias risk so I could see myself owning more dividend income/growth ETFs from the U.S. VTI or VYM or HDV come to mind.

Happy investing all.


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## OnlyMyOpinion

milhouse said:


> I don't think there's value in migrating investments from an RRSP to a RRIF under age 65 is there, since you lose flexibility (ie forced withdrawals) and cannot claim the Pension Income Tax Credit from RRIF income until 65??


The reason usually given for converting to a RRIF is because most places will charge you for each RRSP withdrawl but not for RRIF payments.
Remember you can roll just a portion of you RRSP into a RRIF to match your needs and keep the balance in your RRSP. We'll create a small RRIF like this at age 65 to take advantage of the $2k pension credit and keep the balance as RRSP's until 71.


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## james4beach

AltaRed said:


> Also, remember there is not much difference in taxation rates, and thus AT income, between $100k in dividends and capital gains. Consider Total Return in all investments and crystallize some of that cap gains along the way.


Yes, I don't think one should put all their hopes on dividends. They are just a mechanism for extracting cash out of an equity portfolio. I agree they are extremely convenient (automatic) but they don't make capital stretch any further than it would otherwise.

In the sustainable withdrawal rate approaches, dividends don't change the equation. Whether you're selling shares or taking cash in dividend form, you are extracting cash out of a portfolio. If dividends offered some kind of magical workaround to that, you would see that show up in the studies.

For example, the SWR/Trinity studies show that 4% steady withdrawal (with inflation adjustment) from a 100% equities portfolio is not sustainable and has a high probability of portfolio failure. I see many people around here thinking they will circumvent that by using dividends and 'dividend growth', but this can not work. Capital does not last longer just because you are using dividends.

It could be that I'm misinterpreting what people post, but it really sounds to me like they think that capital will last longer, and they can extract larger amounts, thanks to the magic of dividends.


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## james4beach

Maybe I should add, for people with huge amounts of capital (many millions), sure, you can design a portfolio so it just pays out a lot of dividends -- no problem. You never faced a problem of depleting your capital in any case.

But for most of us, who are trying to stretch our capital to generate sufficient retirement income, I think you should be careful about relying too much on dividends.


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## gibor365

OnlyMyOpinion said:


> The reason usually given for converting to a RRIF is because most places will charge you for each RRSP withdrawl but not for RRIF payments.
> Remember you can roll just a portion of you RRSP into a RRIF to match your needs and keep the balance in your RRSP. We'll create a small RRIF like this at age 65 to take advantage of the $2k pension credit and keep the balance as RRSP's until 71.


This is one of the reasons. Other reasons: if you have Spousal RRIF and withdraw minimum payments, you spouse can continue to contribute to another Spousal RRSP and all withdrawals will be applied to you for tax purposes. In SRRSP case - contributor gonna pay taxes on withdravals.
If you start RRIF in you 50's, the minimum RRIF payment is smal , maybe 2.5% and you still have flexibility if you want to withdraw from RRSP. More capital you deplete from your RRIFs, less clawback you gonna have in the future when you start getting CPP and OAS


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## milhouse

OnlyMyOpinion said:


> The reason usually given for converting to a RRIF is because most places will charge you for each RRSP withdrawl but not for RRIF payments.
> Remember you can roll just a portion of you RRSP into a RRIF to match your needs and keep the balance in your RRSP. We'll create a small RRIF like this at age 65 to take advantage of the $2k pension credit and keep the balance as RRSP's until 71.


Thanks for the point on the potential fee difference between withdrawing from an RRSP and RRIF. 




gibor365 said:


> This is one of the reasons. Other reasons: if you have Spousal RRIF and withdraw minimum payments, you spouse can continue to contribute to another Spousal RRSP and all withdrawals will be applied to you for tax purposes. In SRRSP case - contributor gonna pay taxes on withdravals.
> If you start RRIF in you 50's, the minimum RRIF payment is smal , maybe 2.5% and you still have flexibility if you want to withdraw from RRSP. More capital you deplete from your RRIFs, less clawback you gonna have in the future when you start getting CPP and OAS


Starting to work down the RRSP/RRIF close to the start of retirement is definitely in the plans but I've somewhat of painted myself in a corner with my targeted dividend income x gross-up combined with my DC pension so I expect OAS to be clawed back.


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## gibor365

milhouse said:


> Thanks for the point on the potential fee difference between withdrawing from an RRSP and RRIF.
> 
> 
> 
> 
> Starting to work down the RRSP/RRIF close to the start of retirement is definitely in the plans but I've somewhat of painted myself in a corner with my targeted dividend income x gross-up combined with my DC pension so I expect OAS to be clawed back.


More monery you withdraw from RRIF at early stages, less minimum payment you gonna receive when you start your DC, OAS, CPP etc., thus - less clawback


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## like_to_retire

gibor365 said:


> More money you withdraw from RRIF at early stages, less minimum payment you gonna receive when you start your DC, OAS, CPP etc., thus - less clawback


I think you have to look at that tactic in concert with all the factors that can reduce its advantage. You lose your tax free compounding on the funds withdrawn, plus, you will be taxed on those funds once they're invested in a non-registered account, plus, the withdrawn funds can push you into a higher marginal tax bracket or at the least be taxed in the present bracket thus raising your effective average tax rate. It's a time consuming exercise that usually ends with the results being a wash.

ltr


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## gibor365

Yes, but when you withdraw from RRIF/RRSP , you gonna be taxes on amount of withdrawals, in non-reg - you will be taxed onlyon interest earned.... big difference


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## milhouse

gibor365 said:


> More monery you withdraw from RRIF at early stages, less minimum payment you gonna receive when you start your DC, OAS, CPP etc., thus - less clawback


I'm hoping to strike the right balance between withdrawing as much as possible from my RRSP/RRIF while not getting too heavily taxed on the withdrawals. I likely need to graph it to see what withdrawal rate is most tax efficient. Right now my estimates are to withdraw $40k/yr from my RRSP/RRIF starting in year 2 of my retirement. That's currently giving me about a 25% tax on the withdrawals assuming $50k in dividends and that portion should be taxed at 0% (I realize that it doesn't really work that way but that's how I'm viewing for my assumptions.) Assuming a 5.5% nominal rate of return, that would deplete my RRSP/RRIF by age 71 but I wouldn't have touched my DC pension yet. But I could get canned tomorrow and all my estimates are out the window...


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## steve41

From an after tax point of view, the most efficient strategy is to maximize your RRSP contributions pre-retirement and shelter it after retirement. Full stop.


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## GreatLaker

This is a good article: Which Account Should I Draw First In Retirement?

It basically says that withdrawing from non-registered is more tax efficient because on non-reg withdrawals you are only taxed on the capital gain, at half the rate of other income including tax-deferred accounts (i.e. RRSP, RRIF, LIRA etc.).

This is offset by the potential to reduce future taxes by withdrawing from tax-deferred accounts after retirement but before age 71 when mandatory RRIF conversion takes place, to reduce or eliminate OAS clawback, and possible higher taxes on death of the first spouse, or high estate* taxes on death of the last survivor. 

The challenging part is determining how much to withdraw early, before mandatory RRIF conversion at age 71, to minimize OAS clawback and possible higher taxes on mandatory RRIF withdrawals. Personally I think that draining an RRSP aggressively soon after retirement is not optimal; others may disagree.


* I used the term estate taxes to refer to tax on deemed disposition of assets on death of the account holder if there is no surviving spouse. Canada of course does not have a true estate tax.


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## like_to_retire

gibor365 said:


> Yes, but when you withdraw from RRIF/RRSP , you gonna be taxes on amount of withdrawals, ...........


Correct, but if you start making those withdrawals early, as you suggest, you're missing out on the tax deferral in the registered account. Deferring tax is an advantage.

ltr


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## gibor365

like_to_retire said:


> Correct, but if you start making those withdrawals early, as you suggest, you're missing out on the tax deferral in the registered account. Deferring tax is an advantage.
> 
> ltr


Correct, but I start to withdraw earlier because i don't have other income (except interest from HISA/GIC). When I was contributing to RRSP , I got tax break from high tax bracket, when I withdraw earlier, I will be paying 0 tax. So, whatis the difference,to keep money sheltered or take them out w/o paying taxes?! Also, my wife is younger than me by 9 years and she contimues to work, so she will continue to max RRSP contribution to my SRRSP and her RRSP.


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## tygrus

You guys are right in the govt crosshairs;

https://www.theglobeandmail.com/new...tors-and-other-professionals/article35717410/

_The second proposed measure would harmonize the treatment of “passive” investment portfolios. Under the current system, high-income Canadians can benefit from a more favourable taxation rate for income derived by stocks and real-estate investments when the investment is held in a private corporation. The proposed measure would not be applied retroactively, but rather to future investments._


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## like_to_retire

gibor365 said:


> So, whatis the difference,to keep money sheltered or take them out w/o paying taxes?! .


Fine, but you didn't offer that context when you made a blanket statement that: "_More monery you withdraw from RRIF at early stages, less minimum payment you gonna receive when you start your DC, OAS, CPP etc., thus - less clawback_".

I was attempting to add that context.

My bad.

ltr


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## AltaRed

As always, individual strategies are situational and context is required when assertions are made. Clawbacks, specifically OAS, matter to a specific group of people only. Be careful about the 15% clawback tail wagging the dog.


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## milhouse

I've read mixed opinions around using your registered vs non-registered accounts first. I'll likely eventually post my situation in the money diaries section and have people provide suggestions and/or poke holes in my assumptions.


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## gibor365

> As always, individual strategies are situational and context is required when assertions are made


 Obviously, in my situation, the major advantage of conversion to SRRIF, that I will be paying no taxes on withdrawals, and my wife will continue contribution to SRRSP thus paying much less taxes.
however, imho, the general rule is - try to withdraw cash from RRIFs w/o paying taxes


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## OnlyMyOpinion

tygrus said:


> You guys are right in the govt crosshairs;
> https://www.theglobeandmail.com/new...tors-and-other-professionals/article35717410/
> _The second proposed measure would harmonize the treatment of “passive” investment portfolios. Under the current system, high-income Canadians can benefit from a more favourable taxation rate for income derived by stocks and real-estate investments *when the investment is held in a private corporation*. The proposed measure would not be applied retroactively, but rather to future investments._


This relates to those using a CCPC (Canadian Controlled Private Corporation) simply to access lower taxes on your investments. Don't know how many here are doing that. There are good reasons to have your business and its investments in a CCPC, but using it to simply duck taxes that the rest of us pay hopefully won't cut it in the future.


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## OnlyMyOpinion

True story: I got a call earlier today from a person checking a rental application that I am acting as co-signor for.
I had provided a redacted page 2 of 2016 T1 and NOA for income verification. They were calling concerned about my capacity since my CPP retirement income reported on line 114 is not very much. I pointed out that line 120 was 109k from a blue chip dvidend portfolio. 
But based on their response, I don't think they knew what the terms blue chip, dividend or portfolio were. 
I remain unsure whether they will approve a 1000/mo apartment rental. :confused2:


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## Eclectic12

OnlyMyOpinion said:


> This relates to those using a CCPC (Canadian Controlled Private Corporation) simply to access lower taxes on your investments. Don't know how many here are doing that. There are good reasons to have your business and its investments in a CCPC, but using it to simply duck taxes that the rest of us pay hopefully won't cut it in the future.


The tax section has business or professional types talking about CCPC's so they may be at risk.

I would have to go through the thread to be sure but I recall the discussion involving taxable, TFSA and RRSP/Spousal RRSP accounts - with no mention of a CCPC being used. 

If there is something that might be in the gov't crosshairs that would affect those aiming to get to or above $50K/$100K of eligible dividends to early retire with - I would think more would affected should the gov't increase the inclusion rate. If the current 50% inclusion rate was upped to say 60%, everyone would be affected when the selling happens. Those living off the aimed for $50K/$100K of eligible dividends to fund early retirement may not be all that concerned if the eligible dividend preferred tax rate stays as-is.


Cheers


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## Jaberwock

Passive investments in a corporation (i.e. investments that have no connection to the business) are already taxed at the highest personal rate. Eligible dividends are taxed in the corporation at 38 1/3%


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## Pluto

My Own Advisor said:


> Cannew has a great problem to have in retirement  A tax problem with $100K in dividends.
> 
> Kidding aside he has done very, very well on the investing front. Most of us will not "get there".
> 
> I just updated my income journey this am.
> http://www.myownadvisor.ca/june-2017-dividend-income-update/


Upon reading your blog post: - good move on getting rid of the etf's.


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## Pluto

james4beach said:


> For example, the SWR/Trinity studies show that 4% steady withdrawal (with inflation adjustment) from a 100% equities portfolio is not sustainable and has a high probability of portfolio failure. I see many people around here thinking they will circumvent that by using dividends and 'dividend growth', but this can not work. Capital does not last longer just because you are using dividends.


I don't really get this. I set up a fictional portfolio for my enlightenment. It has 10 dividend paying stocks and commenced about a year ago - banks, piplines and telecom, with a fictional starting value of 500,000. Presently, it is up 11.5% since last August with a current value of 557,755. Of the gain, 34,175 is capital paper gain, and 21,570 is cash from dividends. 

You seem to be saying that if one spends the dividends, 4.31% of the invested 500,000, the portfolio is not sustainable. I don't get it. 

You are implying that a dividend portfolio has no profit, and taking out 4%, is just getting back capital that you put in, so it is not sustainable. but these comapnies do make a profit, and only payout a portion of the profit. so it looks sustainable to me.


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## gibor365

> Upon reading your blog post


 MOA, yours and ours Canadian dividend payers are matching 70-75%, except we hold several "restaurants" KEG, SRV, BPF and some more and couple of industrials MG, CHE.UN.
Similary I got rid of ZUT and now hold separately FTS, EMA, CU, ENB and got rid of XRE ... still hold ZRE in 1 of TFSA accounts (maybe gonna at some point to eliminate it too). 
I also hold mostly ETFs for international stocks , but for US - mostly individual stocks (dividends champions and contenders as per D. Fish spreadsheet).
This year we're aiming to get $28-29K in dividends (all accounts non-reg + reg + TFSA) and around 14K in GIC/HISA interest


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## AltaRed

Pluto said:


> I don't really get this. I set up a fictional portfolio for my enlightenment. It has 10 dividend paying stocks and commenced about a year ago - banks, piplines and telecom, with a fictional starting value of 500,000. Presently, it is up 11.5% since last August with a current value of 557,755. Of the gain, 34,175 is capital paper gain, and 21,570 is cash from dividends.
> 
> You seem to be saying that if one spends the dividends, 4.31% of the invested 500,000, the portfolio is not sustainable. I don't get it.
> 
> You are implying that a dividend portfolio has no profit, and taking out 4%, is just getting back capital that you put in, so it is not sustainable. but these comapnies do make a profit, and only payout a portion of the profit. so it looks sustainable to me.


You cannot look at one year. Have to consider a decade or two in the analysis. Still, I don't get j4b either. ISTM he is mixing up the discredited 4% SWR with equity market returns, where it is sequence of returns risk that gets investors into trouble. 4% SWR is also NOT based on a 100% equities portfolio (it is 60/40 equity/debt I believe).

From an actual equity market perspective, the TSX has returned about 7% CAGR (real) historically since 1980 (per Stingy Investor Asset Mixer). That implies a corresponding 7% ROE on the collective market. Thus a 4% dividend yield paid out to shareholders still allows for corporate growth of 3%, which means stock price growth of 3%, and thus matching dividend growth of 3%. The 36 year numbers are at least a few percentage points beter in CAD for the S&P500.


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## like_to_retire

AltaRed said:


> You cannot look at one year. Have to consider a decade or two in the analysis. Still, I don't get j4b either. ISTM he is mixing up the discredited 4% SWR with equity market returns, where it is sequence of returns risk that gets investors into trouble. 4% SWR is also NOT based on a 100% equities portfolio (it is 60/40 equity/debt I believe).
> 
> From an actual equity market perspective, the TSX has returned about 7% CAGR (real) historically since 1980 (per Stingy Investor Asset Mixer). That implies a corresponding 7% ROE on the collective market. Thus a 4% dividend yield paid out to shareholders still allows for corporate growth of 3%, which means stock price growth of 3%, and thus matching dividend growth of 3%. The 36 year numbers are at least a few percentage points beter in CAD for the S&P500.


I've looked the Trinity Study tables before and when using the parameters that James suggested of 100% equities and adjusted for inflation with 4% withdrawal, it's appears sustainable for a really long time. See the chart below for Trinity Study of _Percentage of all Past Payout Periods From 1926 to 1995 that are Supported by the Portfolio After Adjusting Withdrawals for Inflation and Deflation_

View attachment 15810


ltr


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## My Own Advisor

gibor365 said:


> MOA, yours and ours Canadian dividend payers are matching 70-75%, except we hold several "restaurants" KEG, SRV, BPF and some more and couple of industrials MG, CHE.UN.
> Similary I got rid of ZUT and now hold separately FTS, EMA, CU, ENB and got rid of XRE ... still hold ZRE in 1 of TFSA accounts (maybe gonna at some point to eliminate it too).
> I also hold mostly ETFs for international stocks , but for US - mostly individual stocks (dividends champions and contenders as per D. Fish spreadsheet).
> This year we're aiming to get $28-29K in dividends (all accounts non-reg + reg + TFSA) and around 14K in GIC/HISA interest


Yeah, the more I read up on this approach and see the long-term returns, the more I'm convinced that unbundling XIU for example, and then sprinkling-in some smaller caps (at each investors discretion mind you) is a good way to go.

Personally I don't see lots of value in ZRE or XRE or VRE - unbundle that too! 

Close to $30K per year in dividends is great. I might "be there" if I included my RRSP in my updates but I don't because part of that RRSP money is not mine to keep 

Onwards and upwards gibor!!


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## AltaRed

like_to_retire said:


> I've looked the Trinity Study tables before and when using the parameters that James suggested of 100% equities and adjusted for inflation with 4% withdrawal, it's appears sustainable for a really long time. See the chart below for Trinity Study of _Percentage of all Past Payout Periods From 1926 to 1995 that are Supported by the Portfolio After Adjusting Withdrawals for Inflation and Deflation_


I believe the Trinity study is based on: 1) the S&P500 I think which is at least 2-3 pecentage points better in historical CAGR market returns than Canada, 2) I suspect Canadian portfolio costs are higher. That said, we don't know what the future holds either. 

Discussion on 4% SWR shouldn't be the debate here though. It is about how corporations in aggregate should be able to sustain (and even grow via re-investment of retained earnings) their intrinsic value despite a 4% dividend yield.

Added: To me, the sweet spot for someone who wants to live off a divdend portfolio whilst preserving capital should aim for not more than a 3-4% dividend yield, thereby allowing sufficient re-investment in the businesses to grow the businesses at least as much as inflation AND thereby allowing matching dividend growth. I haven't done any homework to really zero in on the sustainable dividend yield... just a hunch 3-4% will do it on a 100% Cdn equity portfolio. Add an AA to US stocks and the answer should even be better.


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## gibor365

My Own Advisor said:


> Yeah, the more I read up on this approach and see the long-term returns, the more I'm convinced that unbundling XIU for example, and then sprinkling-in some smaller caps (at each investors discretion mind you) is a good way to go.
> 
> Personally I don't see lots of value in ZRE or XRE or VRE - unbundle that too!
> 
> Close to $30K per year in dividends is great. I might "be there" if I included my RRSP in my updates but I don't because part of that RRSP money is not mine to keep
> 
> Onwards and upwards gibor!!


I include everything, include my wife non-reg and her and mine LIRAs, yes we won't be able to take dividends out of LIRAs, but stillwe can supplement $ amount of it from cash or RRIFs.
I still keep ZRE, as it in TFSA and worth about 10K, all my individual REITs I hold accross 6 different accounts, so I just have no idea , how to unbundle


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## My Own Advisor

Agreed AR. Conservatively or to a fault, I dunno, I'm hoping for 4% yield on my 30-40 CDN stocks. I also hope for about 4% real return on my US ETFs. 

If it's higher, I will be overjoyed. If it's lower, I simply start to dip into some capital as I get older and/or cut international travel. Not overly worried as long as I can keep my savings rate intact for another 5-7 years.


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## My Own Advisor

gibor365 said:


> I include everything, include my wife non-reg and her and mine LIRAs, yes we won't be able to take dividends out of LIRAs, but stillwe can supplement $ amount of it from cash or RRIFs.
> I still keep ZRE, as it in TFSA and worth about 10K, all my individual REITs I hold accross 6 different accounts, so I just have no idea , how to unbundle


Why not keep some REITs in TFSA for income and _some growth_? Unbundle via holding HR.UN, CAR.UN, and a few others in TFSA. Other accounts hold more growth stocks and US assets no?


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## james4beach

Pluto said:


> You seem to be saying that if one spends the dividends, 4.31% of the invested 500,000, the portfolio is not sustainable. I don't get it.


My impression was that when using the constant withdrawal method (meaning 4% of initial value plus inflation adjustment each year), the 100% equity portfolio has a relatively high failure rate. What the studies found to be most sustainable was a mix of stocks and bonds.

So whether that 4% comes in the form of sales and/or dividends, is beside the point. The point is that 4% withdrawal rate with 100% equity allocation is not a good idea. See my reference, below.

Whether your dividend method actually implements this, precisely, is also another question. In my answer I was assuming strictly following the SWR style (4% of initial + inflation adjustment).

The reason this can deplete a portfolio is that stocks are volatile. When you get a series of bad years, if you are still withdrawing 4% of original amount plus inflation adjustment, you are taking huge amounts out of a very volatile portfolio. This causes enormous damage to the portfolio.



like_to_retire said:


> I've looked the Trinity Study tables before and when using the parameters that James suggested of 100% equities and adjusted for inflation with 4% withdrawal, it's appears sustainable for a really long time.


I was using some of the latest studies, one of them being this one. These are notes from one of the authors. The accompanying paper is from this guy and Pfau, and is the most recent study in this space.
https://www.kitces.com/blog/should-...is-a-rising-equity-glidepath-actually-better/

The first table there shows that a constant 100% equity portfolio at 4% withdrawal has 88.3% probability of success over 30 years.

The second graph is also important. It looks at the 5th percentile of results, i.e. the really bad/unfortunate outcomes. This shows that a constant 100% equity allocation at 4% withdrawal supports the level of desired income *for only 21.1 years*. In contrast, portfolios that include bonds get much closer to 30 years.

The next graph shows results under some return expectations that have been adjusted to the modern environment. Call it a more pessimistic expectation of returns which takes into account current stock and bond valuations. This one shows that constant 100% equity allocation *can only support 15.4 years of desired income.* It's actually the worst result on the whole board.

I think the message here is clear. 100% equity allocation is a bad idea for a constant withdrawal scheme. Dividends don't change the result. If you use dividends to implement the literal 4% withdrawal scheme, there is a high probability of portfolio depletion or inability to keep producing the expected income. In many outcomes you will be fine, but there is a significant number of outcomes where you deplete the portfolio by withdrawing too much (e.g. in the form of dividends) and destroy the portfolio.

The way to solve that is to add bonds to your portfolio, not rely entirely on dividends. Or, don't use a constant withdrawal scheme, but some alternative scheme with variable withdrawals.


----------



## gibor365

My Own Advisor said:


> Why not keep some REITs in TFSA for income and _some growth_? Unbundle via holding HR.UN, CAR.UN, and a few others in TFSA. Other accounts hold more growth stocks and US assets no?


I hold HR.UN, as well as REI.UN, SRU.UN, PLZ.UN and some others in other accounts and don't feel comfortable holding same stock in different accounts, even though may be I'm mistken


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## AltaRed

james4beach said:


> The way to solve that is to add bonds to your portfolio, not rely entirely on dividends. Or, don't use a constant withdrawal scheme, but some alternative scheme with variable withdrawals.


That is precisely the point. Throw out the conventional 4% SWR and move to Variable Percentage Withdrawal. The asset mixer for the 1980-2016 period says it is entirely feasible to withdraw 4% of market value at the beginning of each year (Canadian or US stocks in particular), provided one keeps their portfolio costs (MER + commissions) low enough to not be a factor. That 4% can be in most any combination one wants, provided the investor does not default to high yield junk that doesn't have at least high single digits ROE. Some dividend ETFs themselves will provide a 4% yield just on distributions.


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## Jaberwock

Pluto said:


> I don't really get this. I set up a fictional portfolio for my enlightenment. It has 10 dividend paying stocks and commenced about a year ago - banks, piplines and telecom, with a fictional starting value of 500,000. Presently, it is up 11.5% since last August with a current value of 557,755. Of the gain, 34,175 is capital paper gain, and 21,570 is cash from dividends.
> 
> You seem to be saying that if one spends the dividends, 4.31% of the invested 500,000, the portfolio is not sustainable. I don't get it.
> 
> You are implying that a dividend portfolio has no profit, and taking out 4%, is just getting back capital that you put in, so it is not sustainable. but these comapnies do make a profit, and only payout a portion of the profit. so it looks sustainable to me.


James is ultra-conservative with his investments.

I started withdrawals from my RRIF three years ago at just over 5% of the value, but the residual value kept going up. This year I increased it to 7% to avoid the risk of being hit with high taxes from compulsory minimum withdrawals later in life. The residual value is still going up.

With the right choice of dividend paying blue chip stocks, banks, utilities and pipelines, plus some REITs, it is easy to put together a portfolio that will allow you to take out 5% per year for 30 years or more. If you pick stocks that regularly increase their dividends, you will more than compensate for inflation.


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## like_to_retire

james4beach said:


> I was using some of the latest studies, one of them being this one. These are notes from one of the authors. The accompanying paper is from this guy and Pfau, and is the most recent study in this space.
> https://www.kitces.com/blog/should-...is-a-rising-equity-glidepath-actually-better/
> 
> The first table there shows that a constant 100% equity portfolio at 4% withdrawal has 88.3% probability of success over 30 years.
> 
> The second graph is also important. It looks at the 5th percentile of results, i.e. the really bad/unfortunate outcomes. This shows that a constant 100% equity allocation at 4% withdrawal supports the level of desired income *for only 21.1 years*. In contrast, portfolios that include bonds get much closer to 30 years.
> 
> The next graph shows results under some return expectations that have been adjusted to the modern environment. Call it a more pessimistic expectation of returns which takes into account current stock and bond valuations. This one shows that constant 100% equity allocation *can only support 15.4 years of desired income.* It's actually the worst result on the whole board.
> 
> I think the message here is clear. 100% equity allocation is a bad idea for a constant withdrawal scheme. Dividends don't change the result. If you use dividends to implement the literal 4% withdrawal scheme, there is a high probability of portfolio depletion or inability to keep producing the expected income. In many outcomes you will be fine, but there is a significant number of outcomes where you deplete the portfolio by withdrawing too much (e.g. in the form of dividends) and destroy the portfolio.
> 
> The way to solve that is to add bonds to your portfolio, not rely entirely on dividends. Or, don't use a constant withdrawal scheme, but some alternative scheme with variable withdrawals.


Yeah, thanks for that very interesting article James. The takeaway being the quote: _"Yet recent research shows that despite the contrary nature of the strategy – allowing equity exposure to increase during retirement when conventional wisdom suggests it should decline as clients age – it turns out that a “rising equity glidepath” actually does improve retirement outcomes!"_

I know that I've read responses by AltaRed about this issue (on this or the other forum) regarding increasing equity exposure as we age in retirement. It's something that I've actually done myself as I've better established my costs and requirements in retirement. I doubt I'll ever get above 40% equity exposure though.

For sure, the original Trinity study graphs end in 1995, and so are somewhat dated. A lot has happened since then (the worst being 2000-2003 and 2008, etc,).

ltr


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## canew90

james4beach said:


> My impression was that when using the constant withdrawal method (meaning 4% of initial value plus inflation adjustment each year), the 100% equity portfolio has a relatively high failure rate. What the studies found to be most sustainable was a mix of stocks and bonds.
> 
> So whether that 4% comes in the form of sales and/or dividends, is beside the point. The point is that 4% withdrawal rate with 100% equity allocation is not a good idea. See my reference, below.
> 
> Whether your dividend method actually implements this, precisely, is also another question. In my answer I was assuming strictly following the SWR style (4% of initial + inflation adjustment).
> 
> The reason this can deplete a portfolio is that stocks are volatile. When you get a series of bad years, if you are still withdrawing 4% of original amount plus inflation adjustment, you are taking huge amounts out of a very volatile portfolio. This causes enormous damage to the portfolio.
> 
> 
> 
> I was using some of the latest studies, one of them being this one. These are notes from one of the authors. The accompanying paper is from this guy and Pfau, and is the most recent study in this space.
> https://www.kitces.com/blog/should-...is-a-rising-equity-glidepath-actually-better/
> 
> The first table there shows that a constant 100% equity portfolio at 4% withdrawal has 88.3% probability of success over 30 years.
> 
> The second graph is also important. It looks at the 5th percentile of results, i.e. the really bad/unfortunate outcomes. This shows that a constant 100% equity allocation at 4% withdrawal supports the level of desired income *for only 21.1 years*. In contrast, portfolios that include bonds get much closer to 30 years.
> 
> The next graph shows results under some return expectations that have been adjusted to the modern environment. Call it a more pessimistic expectation of returns which takes into account current stock and bond valuations. This one shows that constant 100% equity allocation *can only support 15.4 years of desired income.* It's actually the worst result on the whole board.
> 
> I think the message here is clear. 100% equity allocation is a bad idea for a constant withdrawal scheme. Dividends don't change the result. If you use dividends to implement the literal 4% withdrawal scheme, there is a high probability of portfolio depletion or inability to keep producing the expected income. In many outcomes you will be fine, but there is a significant number of outcomes where you deplete the portfolio by withdrawing too much (e.g. in the form of dividends) and destroy the portfolio.
> 
> The way to solve that is to add bonds to your portfolio, not rely entirely on dividends. Or, don't use a constant withdrawal scheme, but some alternative scheme with variable withdrawals.


Bunch of crap. Maybe if one is relying upon Selling equities, than the numbers may be relevant but one holding only DG stocks, not all equities, be it 100% or whatever, and if the dividends are meeting or exceeding their expense, than they should keep them ahead of inflation. Very unlikely they will run out of funds.

Remind me to update this (whether our dividends will suffer) when we go through our next market crisis!


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## like_to_retire

canew90 said:


> Bunch of crap. Maybe if one is relying upon Selling equities, than the numbers may be relevant but one holding only DG stocks, not all equities, be it 100% or whatever, and if the dividends are meeting or exceeding their expense, than they should keep them ahead of inflation. Very unlikely they will run out of funds.


I guess if we're in a long extended period where companies don't reduce or cut their dividends, it would appear that predicting problems with this strategy would seem like crazy talk. But it hasn't always been that way. Things can change.

ltr


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## AltaRed

like_to_retire said:


> I guess if we're in a long extended period where companies don't reduce or cut their dividends, it would appear that predicting problems with this strategy would seem like crazy talk. But it hasn't always been that way. Things can change.
> 
> ltr


Indeed, things can change...and they will!

Investors today forget we have been in a 30+ year bond bull, which gives a strong tailwind to dividend stocks. As cost of debt continued to decrease, it allowed corporations to take more of that debt interest and re-invest into the business and/or increase dividends. The bond bull is essentially over. 

Over the last 10 years, we hit a low of 0.6% Sept 2016 with GOC 5 year bond yield vs high of 4.63% July 2007), a low of 0.98% Sept 2016 for 10 year bonds vs high of 4.58% in July 2007, a low of 1.63% in Sept 2016 for long term bonds vs a high of 4.5% in July 2007. 2007 had a flat yield curve. We haven't had it any better. 

All bond yield rates are up from 2016 lows and that will cause a headwind for both dividend growth AND share price growth going forward. Imagine another 2-3 percentage points on debt. It won't be nearly as good going forward as Canew90 suggests but maybe good enough to come close to the Asset Mixer historical equity return rates at Stingy Investor (note Stingy Investor only has 1980-2016 data - basically the entire length of the bond bull)


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## milhouse

My strategy is kind of a mix of dividend growth and couch potato index investing. Please feel free to poke holes in my ad hoc method.

I originally started this thread asking about max dividends without tax because I'm hoping to use blue chip Canadian dividends to form kind of a floor for my retirement income with some potential to slowly raise that floor over time through dividend growth. The withdrawal plan from this dividend component of my portfolio is to primarily withdraw the dividends but also a bit of capital, only if/when the dividends are grow beyond the tax credits. 
I'm hoping to limit portfolio disaster risk by primarily taking the dividends as stated above but also keep up with inflation with hopefully some dividend growth and some strategic withdrawals on the couch potato index side of my portfolio. I'm obviously still at risk if companies run into trouble and have to cut their divvies but I'm relying on the faith of "this company has paid a dividend for over 40 years". 
I don't think the constant withdrawal method with 4% withdrawal + increases plays into the dividend side because people using the dividend strategy have different withdrawal parameters/methodology.


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## gibor365

> Indeed, things can change...and they will!
> 
> Investors today forget we have been in a 30+ year bond bull, which gives a strong tailwind to dividend stocks


Yes, but there are 21 S&P stocks who increased dividends more than 50 years in a row.... Familiar to everyone tickers: JNJ, PG, KO, EMR etc


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## james4beach

AltaRed said:


> That is precisely the point. Throw out the conventional 4% SWR and move to Variable Percentage Withdrawal. The asset mixer for the 1980-2016 period says it is entirely feasible to withdraw 4% of market value at the beginning of each year (Canadian or US stocks in particular), provided one keeps their portfolio costs (MER + commissions) low enough to not be a factor.


Well I agree with you. Variable withdrawals should work. A coworker showed me a mathematical proof that variable withdrawals are infinitely sustainable as long as your withdrawal rate is lower than the average CAGR.

When I said 100% equities is not sustainable, I meant this is specifically with the fixed withdrawal scheme. That's defined strictly to mean 4% of *initial* value, plus inflation adjustment. People following dividend strategies may not be using this scheme in any case.

For example if you have 500K at 4% withdrawal, that means 20K per year. Let's say the market tanks and stays low for a decade ... the balance becomes 300K, and with the inflation adjustment your withdrawal creeps up to 23K. That's what the fixed withdrawal scheme would dictate: 23K extracted from a 300K portfolio.

If someone is following a dividend approach, they probably would not have withdrawals like that. More likely, their dividends would reduce along with the bear market, and that is no longer a fixed scheme so it's a whole different story.

*But it does make me wonde*r, what do the dividend investors think would happen to their portfolios under such a scenario? You originally were collecting 20K in dividends on a 500K portfolio, and the divs probably crept up to 22K over the years. Then the market tanks, your portfolio shrinks to 300K and stays down there for a few years. How much in dividends do you think you'd be collecting now?

If you answer that it's still around 22K in dividends... are you telling me your portfolio now has a 7.3% div yield?

If you answer that the dividends decline, I think that's probably true, but how much would they decline and can you tolerate that in your retirement income? For example the cashflow sequence would look like 20K, 21K, 22K, 12K, 12K, 13K. How are you going to live off that?


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## gibor365

james, it depends on everyone's portfolio , as I mentioned above "


> Yes, but there are 21 S&P stocks who increased dividends more than 50 years in a row.... Familiar to everyone tickers: JNJ, PG, KO, EMR etc


.

Last recession Canadian banks, telcos and big utilities didn't cut dividends.



> If you answer that it's still around 22K in dividends... are you telling me your portfolio now has a 7.3% div yield?


 Can be the case for some portfolio, in 2009 RY yielded more than 7.3% and BMO .... more than 10%!
At&t more than 7%, MO more than 14%.........


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## james4beach

Or maybe this will help illustrate. Here's a graph showing SPY (S&P 500 index) dividends over the years
https://static.seekingalpha.com/uploads/2015/11/26/saupload_SPY-dividend_thumb1.jpg

Here's another one for DVY, a pretty solid American dividend ETF
https://static.seekingalpha.com/uploads/2014/10/21/953363-1413892112392388-Dale-Roberts_origin.png

I don't think you can expect dividends to stay strong during bear markets. What I'm seeing here is a 30% ish decline in dividends when the market fell. In this case, the market recovered very quickly... within just a year! _It could have been much worse._

But what happens when the bear market lasts longer, like 5 or 10 years? Are you really going to be OK with a 30% drop in your retirement income? This is the consequence of variable withdrawal schemes (of which dividend investing is one). Sure, they are sustainable, but what happens when your steady 20K retirement income drops to 14K and stays down there?



gibor365 said:


> Yes, but there are 21 S&P stocks who increased dividends more than 50 years in a row.... Familiar to everyone tickers: JNJ, PG, KO, EMR etc ... Last recession Canadian banks, telcos and big utilities didn't cut dividends


Sounds like a great plan gibor, just pick the stocks that (in hindsight) didn't reduce their dividend!

You should have sent this insight to the people running DVY, with $17 billion in assets.


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## james4beach

Personally I think that the very rapid recovery in 2009 (very brief bear market) followed by a straight 8 year bull market has made many investors overly complacent. People are _expecting_ stocks to act like bonds = make steady payments.

Bonds make guaranteed payments. Stocks don't. The share prices can fall, and so can the dividends.


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## gibor365

> Sounds like a great plan gibor, just pick the stocks that (in hindsight) didn't reduce their dividend!
> 
> You should have sent this insight to the people running DVY, with $17 billion in assets.


Don't know about DVY, but from dividend kings only 1 (MAS) cut dividends in 2008-9, and 1 (DBD) in 2016



> Bonds make guaranteed payments


 Not always, esp in big and long bear market/

btw, why you don't look at prefs?

Also, HISA and GIC interest can fell easily hardly.... 10 y ago Tangerine 5 y GIC was 4.65%, now 2%, HISA was 3.75%, now 0.8%


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## GreatLaker

Something must have changed from the market conditions that existed during the period Bengen used for his study that was the basis for the "4% rule".

Bengen's original study is based on actual historical data for 25 year retirement periods starting from 1926 through 1976. Withdrawal rates greater than 4% from a balanced portfolio indicated a risk of exhausting a portfolio in less than 25 years. Portfolios with 50% to 75% stocks fared the best. Stock percentages over 75% showed an increased failure rate due to sequence of return risk. Remember the study was based on actual historical data designed to have a low risk of exhausting a retirement portfolio even through the worst economic times and investment returns, including the crash of 1929, the late 1930s, and the 1970s. Actual historical data using real investment returns.

Now decades later, people are saying hey, no problem, a portfolio can easily yield 4%, 5% or even higher, with the retiree living purely off dividends and never spending any of the principal. And with people retiring earlier and living longer, retirement could easily last more than 25 years.

So something has changed in the investment environment. What could it be?

were investment returns unusually bad during the study period and we won't experience crashes like 1929 or bear markets/stagflation like the 1970s ever again?
higher dividend yields are now normal and sustainable?
is the market more efficient / more stable so today's high yields are sustainable forever?
Are Canadian dividend stocks like financials and utilities so profitable and protected by oligopolistic markets so they can yield so much higher than the data Bengen's study was based on, not just now but for the investing timeline of current savers and retirees?
other reasons higher yields are now sustainable?


Market move in long-term cycles, long enough for a new generation of investors to forget past crashes and bear markets and think now is normal. But maybe, just maybe "it's different this time" and the investment cycles that existed during the SWR studies by Bengen et.al. will never happen again.


----------



## canew90

james4beach said:


> Personally I think that the very rapid recovery in 2009 (very brief bear market) followed by a straight 8 year bull market has made many investors overly complacent. People are _expecting_ stocks to act like bonds = make steady payments.
> 
> Bonds make guaranteed payments. Stocks don't. The share prices can fall, and so can the dividends.


You seem to assume that a companys' strength and therefore its earnings are dependent upon the movement of the stock market. Companies operate the same whether the price of the stock is up or down. The cause of the market downturn may affect the company or it may not. Look at the Financial crisis, some companies continue to increase their dividend and even the Cdn banks held theirs, as mentioned. Even during the Great Depression there were companies who did not cut their dividend and some increased them.

I recently suggested to MyOwnAdvisor that by using three simple rules and novice investor could be a successful stock picker. I applied those three rules to XIU TSX60, CDZ Cdn Div Arist and VDZ Verizon High Div etf's. In all cases we eliminated 46% to 57% of their holdings and in the case of CDZ 7 of their top 10. Leaving them with a list of stocks with long histories of paying and growing their dividend to pick from. Very likely these companies would continue to pay and even grow their dividend during an extended down market.


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## AltaRed

Canew and Gibor are still forgetting the last 30 years has been a bull bond market that has provided a tailwind for dividend stocks. That corner has now turned with increasing bond yields which will now be headwinds for equities of all colour. We have not had a multi-year bear market for a very long time and when that occurs, it will most likely be a significant awakening on dividend distributions. I don't buy Canew's argument that his choices in aggregate will hold, and even grow, their diividends in the next great bear market.

Will some stocks continue to maintain their dividend distribution? Certainly, but we won't likely know many of those in advance. We can guess some low yield defensive consumer staples stocks most likely will and maybe our big banks but I wouldn't count on many of the remaining blue chips holding their distributions. Bottom line really is the dividend distribution stream will falter during the next bear. How far and for how long are the unknowns. As long as those relying on a dividend income stream for their retirement can plan/accept/adjust for that, they will most likely survive the crisis. 

FWIW, my dividend income component is the largest slice of my cash flow stream in retirement but I sure don't assume it is as good as an annuity income stream. My take is it could be cut by at least a third during the next major bear for a sustained period. I will make my living adjustments when and as necessary.


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## Eclectic12

gibor365 said:


> ... don't feel comfortable holding same stock in different accounts ...


Any particular reason?


Cheers


----------



## Jaberwock

james4beach said:


> I don't think you can expect dividends to stay strong during bear markets. What I'm seeing here is a 30% ish decline in dividends when the market fell. In this case, the market recovered very quickly... within just a year! _It could have been much worse._
> 
> But what happens when the bear market lasts longer, like 5 or 10 years? Are you really going to be OK with a 30% drop in your retirement income? This is the consequence of variable withdrawal schemes (of which dividend investing is one). Sure, they are sustainable, but what happens when your steady 20K retirement income drops to 14K and stays down there?


Which is best? A $20,000/yr income from dividends that drops to $14,000 in bad times, or a $10,000/yr income from bonds and GICs that is guaranteed


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## like_to_retire

Jaberwock said:


> Which is best? A $20,000/yr income from dividends that drops to $14,000 in bad times, or a $10,000/yr income from bonds and GICs that is guaranteed


Good one Jaberwock.


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## gibor365

Eclectic12 said:


> Any particular reason?
> 
> 
> Cheers


No, just psycological


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## gibor365

Jaberwock said:


> Which is best? A $20,000/yr income from dividends that drops to $14,000 in bad times, or a $10,000/yr income from bonds and GICs that is guaranteed


First of all bonds and GIC is NOT guaranteed! Bond can default and during long , strong bear market , many bond can default. 
If you lock GIC for 5 years for 2.5% and inflation hit 10%, who needs those guarantees?!

Regarding dividend income, yes, in specific year it can go down 30-40%... So diversify... we have 50% bonds, 50% real FI + HISA/GIC. Start living from dividends/interest when you have some cushion. 
If we decide thatcan comfortably retire and live from dividends/interest for 60K annually, we will survive if for several years this income will drop to 40K. But instead of taking 2-3 vacations to Europe or S. America, we'll take 1-2 to Cuba.


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## AltaRed

We are now off-topic to the thread title.... 

My key message would be: If one wants to live off $50-100k dividend income stream alone in retirement, one must prepare for a long bear market wthere that dividend stream could be substantially reduced fo a long period of time too.


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## james4beach

GreatLaker said:


> Bengen's original study is based on actual historical data for 25 year retirement periods starting from 1926 through 1976. Withdrawal rates greater than 4% from a balanced portfolio indicated a risk of exhausting a portfolio in less than 25 years. Portfolios with 50% to 75% stocks fared the best. Stock percentages over 75% showed an increased failure rate due to sequence of return risk.


Right. And the results of the follow up studies weren't too different. They confirmed that stock percentages in the zone 50% to 75% are ideal, and higher stock allocations have increased failure risk. The traditional 50/50 or 60/40 balanced fund would be ideal.



> Now decades later, people are saying hey, no problem, a portfolio can easily yield 4%, 5% or even higher, with the retiree living purely off dividends and never spending any of the principal. . . So something has changed in the investment environment. What could it be?


The studies have not changed what they are saying (Pfau/Kitces) as recently the 2013 papers. They still say the same thing.

But dividend investing has become somewhat of a fad in an ultra-low interest rate environment. Many bloggers and book authors are making overly optimistic claims about what dividend investing can give you, somewhat based on a fundamental misunderstanding of what dividends are (many treat it as free money / new money, but in fact it comes directly out of equity value).

One big disconnect here, and a cause of confusion in these conversations, is what 4% SWR means. The studies about portfolio exhaustion are all talking about X% of the initial amount plus inflation adjustment, a constant withdrawal strategy.

So, both parties can be correct at the same time:

- the people citing the SWR studies are correct, that 100% equities has a high portfolio failure rate in a constant withdrawal scheme
- the people saying that dividends are infinitely sustainable are correct, because it's a variable withdrawal and can decline at times



AltaRed said:


> My key message would be: If one wants to live off $50-100k dividend income stream alone in retirement, one must prepare for a long bear market wthere that dividend stream could be substantially reduced fo a long period of time too.


Yes, I totally agree. Living off the dividend stream is infinitely sustainable, but you may face reductions in that income stream, and that may last for many years if and when it happens. It may or may not ever happen.


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## james4beach

Would everyone agree if I stated it this way?

*If you want constant retirement income* that grows with inflation, then you need a 50/50 or 60/40 allocation. This allocation provides the best chance that your money will last a long time. Higher equity allocations increase the sequence risk and can lead to portfolio depletion during bear markets.

*Or, you can use dividends to provide the income* in a 100% stock allocation. The stream of dividends will continue forever, but unlike the above scheme, there might be reductions in the income. During severe bear markets, there could be 30% to 40% cuts in income that last for many years.


Here's a graph showing dividend income from the Vanguard 500 fund back to 1987. Notice the fluctuations in dividend income. Also keep in mind that more severe bear markets have happened, historically. http://www.mymoneyblog.com/wordpress/wp-content/uploads/2012/04/vfinx_div.gif


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## gibor365

> Would everyone agree if I stated it this way?


 Sure, i agree , this why our allocation is about 50/50. So, in my case I'd say, to "live from dividends and interest"


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## Pluto

AltaRed said:


> You cannot look at one year. Have to consider a decade or two in the analysis. Still, I don't get j4b either. ISTM he is mixing up the discredited 4% SWR with equity market returns, where it is sequence of returns risk that gets investors into trouble. 4% SWR is also NOT based on a 100% equities portfolio (it is 60/40 equity/debt I believe).
> 
> From an actual equity market perspective, the TSX has returned about 7% CAGR (real) historically since 1980 (per Stingy Investor Asset Mixer). That implies a corresponding 7% ROE on the collective market. Thus a 4% dividend yield paid out to shareholders still allows for corporate growth of 3%, which means stock price growth of 3%, and thus matching dividend growth of 3%. The 36 year numbers are at least a few percentage points beter in CAD for the S&P500.


Well I'm not sure how a longer term would change things. Its just an illustration to help explain why I don't get his point. However, to humour you, I did it for 10 years commencing Aug 1 2007 and using the same number of shares which means, in part, that not even the whole fictional 500,000 was invested. The result is 
current value 980,184.71 684,814 is equity value, and there rest is cash - 295,370 cash. Of the cash 206,090 was dividends. (so about 89,000 wasn't even invested.)

Now if one spent all the cash over the 10 years, the portfolio value is still 684000, and still paying dividends. If all the cash was invested in the beginning, it would look even better. I don't get why this is not sustainable.


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## AltaRed

james4beach said:


> Would everyone agree if I stated it this way?


No because some can argue the bucket approach works too, i.e. variable equity/FI ratio, not just a particular equity/fixed income allocation. I'd rather say that some fixed income needs to be available to mitigate 'sequence of return' risk in equity markets. 

I also think it is important to recognize most studies apply to the US equity market which historically has outperformed other markets. A caveat may be that adjustments need to be made to compensate for country underperformance ex-USA.


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## AltaRed

Pluto said:


> Well I'm not sure how a longer term would change things. Its just an illustration to help explain why I don't get his point. However, to humour you, I did it for 10 years commencing Aug 1 2007 and using the same number of shares which means, in part, that not even the whole fictional 500,000 was invested. The result is
> current value 980,184.71 684,814 is equity value, and there rest is cash - 295,370 cash. Of the cash 206,090 was dividends. (so about 89,000 wasn't even invested.)
> 
> Now if one spent all the cash over the 10 years, the portfolio value is still 684000, and still paying dividends. If all the cash was invested in the beginning, it would look even better. I don't get why this is not sustainable.


I've not said otherwise, My post says the last 10 years has been sustainable. The math says so. Indeed, the last 36 years of a bond bull market have been sustainable per Asset Mixer data source. What we don't know is what a future bond bear market that we seem to be slowly entering into will be like.


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## GreatLaker

Pluto said:


> Well I'm not sure how a longer term would change things. Its just an illustration to help explain why I don't get his point. However, to humour you, I did it for 10 years commencing Aug 1 2007 and using the same number of shares which means, in part, that not even the whole fictional 500,000 was invested. The result is
> current value 980,184.71 684,814 is equity value, and there rest is cash - 295,370 cash. Of the cash 206,090 was dividends. (so about 89,000 wasn't even invested.)
> 
> Now if one spent all the cash over the 10 years, the portfolio value is still 684000, and still paying dividends. If all the cash was invested in the beginning, it would look even better. I don't get why this is not sustainable.


A person that retired at 55 and lived to 90, not that unusual these days, would have a 35 year retirement. 10 years is not long-term from an investing and retirement perspective.

I'd be interested if you could run the same analysis using data from 1968 to 1981, using real (inflation adjusted) dollars to see how we might fare if those low-return stagflationary economic conditions ever return.


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## Pluto

GreatLaker said:


> A person that retired at 55 and lived to 90, not that unusual these days, would have a 35 year retirement. 10 years is not long-term from an investing and retirement perspective.
> 
> I'd be interested if you could run the same analysis using data from 1968 to 1981, using real (inflation adjusted) dollars to see how we might fare if those low-return stagflationary economic conditions ever return.


yes the 68-81 period is interesting. Unfortunately the portfolio thing I am using does not go back that far. Inflation isn't necessarily bad for equities as many of them just raise their prices for products and services. Gov't regulated utilities might not fare that well in that environment, however.


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## milhouse

AltaRed said:


> No because some can argue the bucket approach works too, i.e. variable equity/FI ratio, not just a particular equity/fixed income allocation. I'd rather say that some fixed income needs to be available to mitigate 'sequence of return' risk in equity markets.
> 
> I also think it is important to recognize most studies apply to the US equity market which historically has outperformed other markets. A caveat may be that adjustments need to be made to compensate for country underperformance ex-USA.


Have you caught this article by Wade Pfau titled "Does the 4% Rule Work around the World?" It gives a bit of analysis around the world. One key assumption variable though is ideal asset allocation.


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## like_to_retire

GreatLaker said:


> A person that retired at 55 and lived to 90, not that unusual these days, would have a 35 year retirement. 10 years is not long-term from an investing and retirement perspective.
> 
> I'd be interested if you could run the same analysis using data from 1968 to 1981, using real (inflation adjusted) dollars to see how we might fare if those low-return stagflationary economic conditions ever return.


Yeah, if you look at those Trinity tables, it's not until 30 years until it falls apart using 4%.

View attachment 15818


ltr


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## AltaRed

Milhouse, I had not seen that...... and am fascinated. I am really surprised at Canada (both in the 4.4% and equity allocation) given its cyclical resource sector...... albeit we also have not had the spectacular meltdowns in the financial sector that the USA has had.


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## Mechanic

Jaberwock said:


> Which is best? A $20,000/yr income from dividends that drops to $14,000 in bad times, or a $10,000/yr income from bonds and GICs that is guaranteed


Well for me I would take the $20k that might drop to $14k over the guaranteed $10k every time. All depends on a person's risk tolerance I suppose. I didn't get to early retirement without some risk and setbacks along the way.


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## AltaRed

Mechanic said:


> Well for me I would take the $20k that might drop to $14k over the guaranteed $10k every time. All depends on a person's risk tolerance I suppose. I didn't get to early retirement without some risk and setbacks along the way.


Most of us would, but ask a Great Depression era person that same question (not that any but a very few still are around). I remember having discussions with my grandparents and parents about that period. It is hard to comprehend the depth of despair and fear that permeated society at that time. Best none of us ever have to experience anything like that.


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## My Own Advisor

gibor365 said:


> Yes, but there are 21 S&P stocks who increased dividends more than 50 years in a row.... Familiar to everyone tickers: JNJ, PG, KO, EMR etc


Own all of those quoted purposely (and will continue to do so) unless they cut their dividends.


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## Eder

I like the fact that most of my equities raise their dividends faster than inflation...many over 10%/year. My bonds,gic's and cash are worth less every day. I have some capital gains on my bonds...most likely that will start to erode as rates go up and I'm thinking of selling them and replace with....ewwww...more gic's.


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## milhouse

AltaRed said:


> Milhouse, I had not seen that...... and am fascinated. I am really surprised at Canada (both in the 4.4% and equity allocation) given its cyclical resource sector...... albeit we also have not had the spectacular meltdowns in the financial sector that the USA has had.


I suspect Canada's ranking is due to how tied our economy is to the US but perhaps a more regulated environment in Canada has prevented steeper meltdowns (??).


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## Pluto

milhouse said:


> Have you caught this article by Wade Pfau titled "Does the 4% Rule Work around the World?" It gives a bit of analysis around the world. One key assumption variable though is ideal asset allocation.


That is an interesting analysis. For Canada, using 4% rule, a 1.2% faliure rate within 30 year horizon. Seems the odds are on our side.


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## james4beach

AltaRed said:


> Milhouse, I had not seen that...... and am fascinated. I am really surprised at Canada (both in the 4.4% and equity allocation) given its cyclical resource sector...... albeit we also have not had the spectacular meltdowns in the financial sector that the USA has had.


Historically, Canada has some of the strongest equity returns in the world. This can be found in the Credit Suisse Yearbook of global returns which goes back to 1900, I think. They describe Canada as having similar long term equity returns to the US.

So I don't know where everyone in these forums gets the idea that Canada does poorly, or that Canadian index investing is a bad idea. Even XIU ... which is the first ETF in the world by the way ... has returned 6.9% since inception in 1999.


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## james4beach

Pluto said:


> That is an interesting analysis. For Canada, using 4% rule, a 1.2% faliure rate within 30 year horizon. Seems the odds are on our side.


Also notice that the best results for Canada -- highest sustainable withdrawal rate -- is achieved with 50% to 70% stock exposure.


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## like_to_retire

james4beach said:


> So I don't know where everyone in these forums gets the idea that Canada does poorly, or that Canadian index investing is a bad idea.


No one thinks Canadian index investing is a bad idea. It's just that it's so darn easy to beat with individual stocks.

ltr


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## james4beach

like_to_retire said:


> No one thinks Canadian index investing is a bad idea. It's just that it's so darn easy to beat with individual stocks.


I also feel like it should be possible to do, but I've only convinced myself with data back to 2000. I don't know if this statement is generally true for the past century.


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## like_to_retire

james4beach said:


> I also feel like it should be possible to do, but I've only convinced myself with data back to 2000. I don't know if this statement is generally true for the past century.


hehe, I don't really plan to live another century. If I made it another 25 years to age 91 it would be a huge bonus.

To me, the biggest hurdle to beating the index is to stop believing the old canard that you can't beat the index. It's that simple. Once you're over that hurdle, the rest is easy.

For myself, I've only been down the road to beating the Canadian index for about 6 years now. Before that I was an indexer. I have tracked the index over that time and for the dates that I have been involved, the index S&P/TSX60 is up 50.6% (7.06% average annual total return). My own stocks over that same period are up 87.7% (11.1% average annual total return).

Not too difficult.

ltr


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## GreatLaker

Pluto said:


> yes the 68-81 period is interesting. Unfortunately the portfolio thing I am using does not go back that far. Inflation isn't necessarily bad for equities as many of them just raise their prices for products and services. Gov't regulated utilities might not fare that well in that environment, however.


Yes there are a lot of distinct yet interrelated factors that are hard to really define the relationship and effects.

My understanding is that equities were bid up to very high valuations in the sixties because of the euphoria of the space age and the concentration of investors buying the "Nifty-Fifty" stocks - a group of the best, blue chip stocks that everyone knew were safe and would never suffer a major decline even in a major bear market or recession. Inflation was caused by a number of factors including the oil crisis, de-coupling the US$ from gold, and debt from the Vietnam war which the government wanted to inflate away. High inflation drove up interest rates, as did economic and population growth driving up demand for borrowing and mortgages. With interest rates so high, investors dumped stocks for bonds because the returns were better so stock prices plummeted to the point where stocks were again fairly valued on a risk adjusted basis. Inflation also crushed real returns. So the late 60s and seventies were horrible times for investors.

Not sure I got all the factors right... appreciate your thoughts on this.

P.S. your signature line seems very appropriate for the discussion and investing in general


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## Pluto

james4beach said:


> So I don't know where everyone in these forums gets the idea that Canada does poorly, or that Canadian index investing is a bad idea. Even XIU ... which is the first ETF in the world by the way ... has returned 6.9% since inception in 1999.


I don't think everyone believes that. In the '70's If I recall right Canada's GDP growth was way higher than the US in many of those years. Canada's GDP has been quite competitive over the years. 
Switching to xiu, in the last year it has 8.43 total return. Not bad. But compare to my fictional banks, piplines, telecom which has done 10.9, xiu doesn't interest me. 
I don't see the diversification in etf's as providing any special safety. Safety is in the quality of the company. 

A portfolio of stocks with above average debt/equity (for their industry-predictible earnings stream can take on more debt), decent return on equity, (perferably 15% or better), and eliminate capital intensive industries that are subject to large cyclical downturns, is the skeleton formula to beat xiu. 

Why would one want the dogs in an etf, when one can filter them out and make their own etf?

Too, my fictional growth portfolio, which pays dividends but not enough to excite a dividend investor, is up 24% since last august. Again, ETF's don't interest me. Its decent debt/equity and mostly 15%+ retrun on equity and tilting to avoid capital intensive names that does it.


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## kelaa

So after more than one week, there were I believe eight responses with numbers, and four who met millhouse's criteria of 50k in dividend income. 

28k
37k
*100k*
*>50k*
29k dividends and 14k interest
*50k*
15k
*109k*


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## tygrus

Looking at the world, I am very bullish on canada now. I see no other place as stable.


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## milhouse

kelaa said:


> So after more than one week, there were I believe eight responses with numbers, and four who met millhouse's criteria of 50k in dividend income.
> 
> 28k
> 37k
> *100k*
> *>50k*
> 29k dividends and 14k interest
> *50k*
> 15k
> *109k*


Haha! Thanks for the summary.


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## Jaberwock

Those Trinity studies were done in 1998 when bond yields were much higher than they are today. They are also based on average stock performances (S&P 500 index), not on a basket of blue chip dividend paying stocks. 

If you were to repeat the studies today, and use a basket of selected dividend stocks, you would get very different results


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## james4beach

Jaberwock said:


> If you were to repeat the studies today, and use a basket of selected dividend stocks, you would get very different results


Dividends are irrelevant. They do not change the result at all, because dividends are just a mechanism to withdraw money from equity. Dividends do not boost returns; they are not free money.

Those studies _have_ been re-done. Here is the most recent one I'm aware of, based on a paper by Kitces & Pfau,
https://www.kitces.com/blog/should-...is-a-rising-equity-glidepath-actually-better/

This table is particularly noteworthy. It shows the number of years that a portfolio can sustain the income level of a 4% *constant* withdrawal strategy, at the 5th percentile of results (really bad outcomes). Equity allocation is on the axes. These results are with updated stock & bond models that reflect the lower likely returns going forward, i.e. modern pricing environment.









Notice that very high equity allocations provide the worst outcomes. The answer (for this pessimistic group of results) is that a heavy bond allocation is still better than a heavy stock allocation. *For a constant 4% withdrawal scheme, a 100% dividend stock portfolio would provide the worst outcome of all results.*

Remember though, dividend portfolios are not constant withdrawal schemes, but rather variable withdrawals. So it requires a different kind of analysis... the content of this post is entirely about constant withdrawal schemes where retirement income is constant + inflation.

I agree that a 100% dividend stock portfolio can provide income, forever. The level of income will steadily rise over time, but there will also be periods where the income will be reduced and could be cut by as much as 30% to 40%. When that happens, you might be stuck with the reduced income for many years. That's the downside to variable withdrawal schemes.


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## milhouse

james4beach said:


> I agree that a 100% dividend stock portfolio can provide income, forever. The level of income will steadily rise over time, but there will also be periods where the income will be reduced and could be cut by as much as 30% to 40%. When that happens, you might be stuck with the reduced income for many years. That's the downside to variable withdrawal schemes.


Do you think dividend income would be cut by as much as 30%-40% from a somewhat broad portfolio of blue chip dividend growth stocks? Taking 2008/09 for an example, I know the financials had a hard time with the banks not raising their dividends and MFC cutting their's significantly. But I think the pipelines, telecoms, and utilities continued to raised their's.


----------



## AltaRed

milhouse said:


> Do you think dividend income would be cut by as much as 30%-40% from a somewhat broad portfolio of blue chip dividend growth stocks? Taking 2008/09 for an example, I know the financials had a hard time with the banks not raising their dividends and MFC cutting their's significantly. But I think the pipelines, telecoms, and utilities continued to raised their's.


Maybe in Canada we got off lucky, but investing should be global for Canadians. We are just a tiny part of the global market and can get steamrollered by the US alone. US dividends, especially from financials, got whackamoled.


----------



## milhouse

AltaRed said:


> Maybe in Canada we got off lucky, but investing should be global for Canadians. We are just a tiny part of the global market and can get steamrollered by the US alone. US dividends, especially from financials, got whackamoled.


I agree we need to be more geographically diversified, even though my portfolio doesn't really reflect it enough. That said, my original post, as titled, was more about Canadian dividend stocks.


----------



## AltaRed

milhouse said:


> I agree we need to be more geographically diversified, even though my portfolio doesn't really reflect it enough. That said, my original post, as titled, was more about Canadian dividend stocks.


This thread keeps getting sidetracked on asset allocations..... Hard to keep all these Type A drivers in the same lane.


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## james4beach

milhouse said:


> Do you think dividend income would be cut by as much as 30%-40% from a somewhat broad portfolio of blue chip dividend growth stocks?


Yes, I really think it could happen. It's happened before not too long ago, as you can see from this graph of a large cap fund (dividend amounts are shown)
http://www.mymoneyblog.com/wordpress/wp-content/uploads/2012/04/vfinx_div.gif

These are large caps and mostly "blue chips" as you call them. From the 90s peak to the first drop, that's a 40% drop in dividends. And this wasn't even a particularly severe bear market.

So yes I think it's totally plausible that even a portfolio of high quality large caps sees a significant decrease in dividends, and it may last for several years. Notice in that graph that the dividend level was lower than the 1999 peak for about 7 years.


----------



## milhouse

james4beach said:


> Yes, I really think it could happen. It's happened before not too long ago, as you can see from this graph of a large cap fund (dividend amounts are shown)
> http://www.mymoneyblog.com/wordpress/wp-content/uploads/2012/04/vfinx_div.gif
> 
> These are large caps and mostly "blue chips" as you call them. From the 90s peak to the first drop, that's a 40% drop in dividends. And this wasn't even a particularly severe bear market.
> 
> So yes I think it's totally plausible that even a portfolio of high quality large caps sees a significant decrease in dividends, and it may last for several years. Notice in that graph that the dividend level was lower than the 1999 peak for about 7 years.


I'll concede the point from the perspective of that large cap fund. 
But we really need to see what's under the hood of the fund to properly comment on the drop in income. What's in the fund now might not be the same previously.
And I'm also guessing many of the folks going the dividend route have a more selective portfolio of individual dividend stocks versus a broader based fund. Just a guess on my part though. I'll pose the question in the investing section. Not sure what kind of difference that makes.


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## james4beach

My belief is that picking stocks that don't cut dividends in a bear market, is as hard as picking stocks that don't decline in a bear market.

Very easy to see in hindsight, but much harder to plan for in advance


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## milhouse

Definitely agree that there are significant elements of risk to it. And each recession is potentially different. 
The common counter point would be "When was the last time a big 5 Canadian Bank cut its dividend?" I think it was Scotia Bank in the 1940's. You've also go Canadian Utilities and Fortis on 45 year and 43 year dividend increase streaks. It's not like any company is invincible but you kind of hope history is on your side with some of your selections.


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## james4beach

milhouse said:


> The common counter point would be "When was the last time a big 5 Canadian Bank cut its dividend?" I think it was Scotia Bank in the 1940's. You've also go Canadian Utilities and Fortis on 45 year and 43 year dividend increase streaks. It's not like any company is invincible but you kind of hope history is on your side with some of your selections.


I see your point, but what kind of portfolio would that be? Perhaps 80% banks, 10% Fortis, 10% Canadian Utilities. That portfolio has other problems.


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## OnlyMyOpinion

james4beach said:


> Yes, I really think it could happen. It's happened before not too long ago, as you can see from this graph of a large cap fund (dividend amounts are shown)
> http://www.mymoneyblog.com/wordpress/wp-content/uploads/2012/04/vfinx_div.gif
> These are large caps and mostly "blue chips" as you call them. From the 90s peak to the first drop, that's a 40% drop in dividends. And this wasn't even a particularly severe bear market.
> So yes I think it's totally plausible that even a portfolio of high quality large caps sees a significant decrease in dividends, and it may last for several years. Notice in that graph that the dividend level was lower than the 1999 peak for about 7 years.


Sorry James, the graph I see shows an overall increase in distributions with time. I think one would start out drawing an income that meets your needs (possibly in conjunction with cpp, pension etc.) and then hope to keep ahead of inflation. This graph starts at $2700/yr of income (2.7% on the initial $100k) and then grows distributions in 24yrs to $8800. That's an avg of $254/yr or 9.4% annualized over 24 years. Not too shabby. According to Ping, during the same time, the investment also grew from $100k to $500k. I think the down years would only be a problem if you foolishly chose to 'reset' your future income needs beyond initital + inflation during the preceding high distribution years. 
Even if we lop off the first few years and start abt 1991, we see an avg increase of $181/yr or 3.6%.

http://www.mymoneyblog.com/2012/04


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## My Own Advisor

milhouse said:


> Definitely agree that there are significant elements of risk to it. And each recession is potentially different.
> The common counter point would be "When was the last time a big 5 Canadian Bank cut its dividend?" I think it was Scotia Bank in the 1940's. You've also go Canadian Utilities and Fortis on 45 year and 43 year dividend increase streaks. It's not like any company is invincible but you kind of hope history is on your side with some of your selections.


I would largely agree. Unfortunately to help predict the future the past is largely all we have.

I would add in the following to your 'secure' dividend list in addition to big 5 or 6 Canadian banks. Some of those banks have paid dividends (with the exception of NA) for over 100 years, some of them _before_ Conferderation:

ENB
EMA
AQN
BCE
T
TRP
CNR
BIP.UN

Yes, while no one company is invincible a collection of them would be unless the entire economy collapses. Then you have bigger things to worry about than dividends.


----------



## milhouse

My Own Advisor said:


> I would largely agree. Unfortunately to help predict the future the past is largely all we have.
> 
> I would add in the following to your 'secure' dividend list in addition to big 5 or 6 Canadian banks. Some of those banks have paid dividends (with the exception of NA) for over 100 years, some of them _before_ Conferderation:
> 
> ENB
> EMA
> AQN
> BCE
> T
> TRP
> CNR
> BIP.UN
> 
> Yes, while no one company is invincible a collection of them would be unless the entire economy collapses. Then you have bigger things to worry about than dividends.


IMO, the end game is ensuring reliable income to maintain your lifestyle. So, I just want to clarify that it's not just about paying a dividend but also not cutting a dividend, and ideally growing the dividend against inflation. 
Definitely the utilities, pipelines, and CNR likely have very solid dividend histories, I haven't checked close enough. 
The telcos are kind of solid but there have been some aberrations. T cut its dividend in the early 2000's to restructure it's business and it took about 5 years to recover. But it was kind of worth it with a bunch of 10% increases and even now with a 7-10% guidance. BCE I think can continue to grow its dividend at a more modest 5% clip. RCI and SJR aren't on the list but while they're maintaining their dividend, they've both suspended their increases. Though, I suspect they'll start increasing them again next year. 

Needless to say, I have confidence enough to have pipelines and telcos in my portfolio too. Haven't added CNR yet but I want to.


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## james4beach

OnlyMyOpinion said:


> Sorry James, the graph I see shows an overall increase in distributions with time. I think one would start out drawing an income that meets your needs (possibly in conjunction with cpp, pension etc.) and then hope to keep ahead of inflation.


Yes it increases with time, I agree, but there is still volatility in the dividend stream that needs to be taken into account. What if someone deployed that portfolio starting in 1997-2000 and expected those current levels of dividends to persist? What if today we're at another peak in that cycle?

The investor will have a rough time when when the income plummets 40%. The fact that the income level will rise over 20 years is of little comfort to the person expecting 50K of annual dividends who is now only receiving 30K.


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## bds

I enjoyed seeing how much people are making from dividends in the summarized chart earlier so I tallied up mine to share. Over the last 12 months I've received $3978.72 in strictly dividends from my investment accounts and mutual fund (very small) that I still have.

It's hard to calculate the exact return since I've added to my investment accounts over the year, but it's about $115k now, likely about $100k a year ago. About 3.6% return. Not all of my stocks are chosen for dividend income, a few don't pay a dividend at all.

I am moving towards more dividend payers going forward since I am planning to work a bit less in the coming years. I will also be deploying about $100k from a recent house sale in the coming months, it will be interesting to see how these figures look next year! I'm hoping to break 10k in dividend income a year from now.


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## Jaberwock

james4beach said:


> Dividends are irrelevant. They do not change the result at all, because dividends are just a mechanism to withdraw money from equity. Dividends do not boost returns; they are not free money.


Dividends may be just another way of passing money from the company to its shareholders, but what you are missing is the fact that stocks that pay dividends, and in particular stocks that regularly increase dividends, are usually well established, low risk investments. 

Generally, dividend paying stocks have better returns, not because they pay dividends, but because they are good companies.


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## james4beach

Jaberwock said:


> Dividends may be just another way of passing money from the company to its shareholders, but what you are missing is the fact that stocks that pay dividends, and in particular stocks that regularly increase dividends, are usually well established, low risk investments.


You're right. The ability to consistently pay dividends is a useful indicator that a company is managing itself well. It's a kind of cashflow stress-test.



> Generally, dividend paying stocks have better returns, not because they pay dividends, but because they are good companies.


Yes, I think so. This also makes an argument (even for indexers) for choosing XIU over XIC. The TSX 60 has the better established Canadian companies, and virtually all XIU holdings pay dividends. Over time, I expect that XIU will outperform XIC slightly. This seems to be true so far with about 0.16% per year better performance over 10 years.


----------



## My Own Advisor

As discussed and shared with you James many times on this forum, I think (we both agree?) XIU is one of the best dividend / equity ETFs you can own in Canada. 

If dividend investors are gun-shy about deconstructing XIU for their own portfolio, hard to go wrong with XIU as your Canadian equity content.


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## james4beach

My Own Advisor said:


> As discussed and shared with you James many times on this forum, I think (we both agree?) XIU is one of the best dividend / equity ETFs you can own in Canada.


I definitely agree. Long and proven track record (actually the first ETF in _the world_), huge asset base, pure eligible dividends, tremendously liquid, and minimal securities lending.

I'm still hoping that one day I will have many millions. $3 million in XIU would provide 60K to 80K with virtually no tax (60K eligible dividends results in $0 tax, except occasional capital gains)


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## AltaRed

james4beach said:


> Long and proven track record (actually the first ETF in _the world_),


I see that BlackRock does claim XIU as the first in the world in 1990. Someone needs to tell Investopedia that little fact http://www.investopedia.com/articles/exchangetradedfunds/12/brief-history-exchange-traded-funds.asp unles BlackRock is cheating a bit and saying XIU is simply a morph of the TIPs35.


----------



## james4beach

AltaRed said:


> I see that BlackRock does claim XIU as the first in the world in 1990. Someone needs to tell Investopedia that little fact http://www.investopedia.com/articles/exchangetradedfunds/12/brief-history-exchange-traded-funds.asp unles BlackRock is cheating a bit and saying XIU is simply a morph of the TIPs35.


Interesting. Yes, TIPS 35 was the first one. TIPS 35 got rolled into iUnits (XIU), so I guess Blackrock is claiming that XIU is the continuation of TIPS 35. Here is the verbatim quote from the XIU annual report of 2000.

Effective as of close of business on March 6, 2000, *the i60 Fund, the continuing Fund*, acquired all the net assets of the Toronto 35 Index Participation Fund (TIPS 35) and the TSE 100 Index Participation Fund (TIPS 100), the terminating funds, in exchange for Units of the i60 Fund, using the purchase method of accounting.​
It may not be fair to say that XIU was the first in the world. It acquired the assets of the first ETF in the world.


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## EngPhysGuy

Jaberwock said:


> Generally, dividend paying stocks have better returns, not because they pay dividends, but because they are good companies.


I'm not sure that I totally agree with this. Generally, the 'dividend paying stocks' who regularly increase their dividends are the large cap blue chip stocks. There have been many periods in history where small caps have outperformed the large caps.


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## TomB19

EngPhysGuy said:


> I'm not sure that I totally agree with this.


I do.

Also, a company with high monthly distribution that is configured to DRIP gains in a non-linear fashion. Quarterly and annual distributing companies do too, but not to the extent of companies that distribute monthly. Each distribution period is a compounding period.

So... a stock that is yielding 9% annually, but pays monthly dividends, will compound monthly if set to DRIP, thus producing more than 9% annually, despite showing a yield of 9% (in this example).




EngPhysGuy said:


> Generally, the 'dividend paying stocks' who regularly increase their dividends are the large cap blue chip stocks.


The highest distributing companies are never big cap blue chips.




EngPhysGuy said:


> There have been many periods in history where small caps have outperformed the large caps.


Sure.


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## james4beach

TomB19 said:


> So... a stock that is yielding 9% annually, but pays monthly dividends, will compound monthly if set to DRIP, thus producing more than 9% annually


This kind of compounding is true for fixed income securities, but not for stocks. That dividend comes directly out of equity value. When you put it back into equity, it's a "null operation" ... nothing has changed.

There are many people out there who are finding high yielding stocks and DRIP'ing the distributions. It's pointless to do so, there is no compounding or amplification effect, because the dividends are not free money (not newly generated) to begin with.


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## Eder

As usual many of us differ...dividend dollars are more valuable than dollars in a company's retained earnings to piss away in various over priced ventures...(que Cenovus) Also dripping often allows purchase of shares at a discount (que TransAlta the worst) and no transaction fees . I doubt the market is efficient regarding dividends...we tend to value those stocks more...if RY cut its dividend today I'm sure it would be trading 20% cheaper next week. 

I have my kids dripping all their stocks, its the most efficient way for them to maximize profits in their account. I don't drip as I actively manage my investments but I do put much more value on a dividend dollar as opposed to a dollar in retained earnings. They are not the same thing.


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## kelaa

I think a distinction can be made for REIT trust units (okay, which are technically not stocks), which are required to distribute their taxable income. I love getting more and more monthly never-taxed dollars from dripping REITs in my TFSA.


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## james4beach

Well, some of these things are "stock market laws". The fact that dividends directly come out of equity is just how the system works. It may be true that there is some market inefficiency, but that can only go so far.

Here's one proof for that. Why not create a corporation, and passively hold fixed income within it that earns 2.5%. Then pay out a 8% dividend. If it's true that reinvesting a dividend creates compounding growth, than an investor in this corporation should get a 8% annual return. You might even have some ill informed stock market investors who will buy it for this reason, but ultimately, the investors will get a 2.5% return, net of dividends and share price changes.


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## Jaberwock

EngPhysGuy said:


> I'm not sure that I totally agree with this. Generally, the 'dividend paying stocks' who regularly increase their dividends are the large cap blue chip stocks. There have been many periods in history where small caps have outperformed the large caps.


Small caps may have outperformed for some periods, but small caps are also more risky and a require a lot more work to pick out the good ones.

Here are some data to show various categories of stock returns from 1986 through 2014:

Category of Stocks Average Annual Return (%) $100,000 Invested

Non-dividend payers +1.0% $132,200

Dividend cutters +1.7% $160,300

The market (TSX Composite) +6.6% $598,700

Dividend payers +10.2% $1,517,300

Dividend growers +12.1% $2,448,800

‘Selected’ pipelines and utilities +16.1% $6,535,900


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## TomB16

kelaa said:


> I think a distinction can be made for REIT trust units (okay, which are technically not stocks), which are required to distribute their taxable income. I love getting more and more monthly never-taxed dollars from dripping REITs in my TFSA.


Me too.

We have two corporate DRIPS that have each made more every month than the previous month. Between the purchase discount and the wonders of compounding, it has been a nice experience.

Our synthetic DRIPs have been operating for less than a year. We have a pair of REITs that have paid us two more shares each month since we set it up. Again, thanks to the wonders of compounding.

I used to feel I could do a better job by manually buying more shares of something every month, based on my indicators, but now I'm happy to just let a few of them DRIP on their own.


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## doctrine

james4beach said:


> Well, some of these things are "stock market laws". The fact that dividends directly come out of equity is just how the system works. It may be true that there is some market inefficiency, but that can only go so far.
> 
> Here's one proof for that. Why not create a corporation, and passively hold fixed income within it that earns 2.5%. Then pay out a 8% dividend. If it's true that reinvesting a dividend creates compounding growth, than an investor in this corporation should get a 8% annual return. You might even have some ill informed stock market investors who will buy it for this reason, but ultimately, the investors will get a 2.5% return, net of dividends and share price changes.


Sure, if you own the entire corporation, but that is not how the stock market works. Your individual returns will be higher in the long run with reinvestment than if you didn't reinvest the dividends. Essentially, it allows an individual to capture what you are looking for - the full effect of return on equity of the company, as if the dividend was wholly reinvested back in the business at identical rate of returns. 

We all know the reason why large blue-chip companies do not reinvest all of their retained earnings, because of course they cannot generate the same return on new capital as their already invested capital, so it makes sense to return a portion to investors. In fact, their average return on equity would drop over time; this is not the most efficient financial model. 

But if the individual then reinvests the dividend back into the company (by buying out another investor, not giving the company more funds), they are effectively getting fully compounded equity returns. A great strategy to increase returns in the long run. And in retirement, the dividends which are now much higher and compounded can be used for everyday expenses.


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## james4beach

AltaRed said:


> I see that BlackRock does claim XIU as the first in the world in 1990. Someone needs to tell Investopedia that little fact http://www.investopedia.com/articles/exchangetradedfunds/12/brief-history-exchange-traded-funds.asp unles BlackRock is cheating a bit and saying XIU is simply a morph of the TIPs35.


A bit off topic, but this Globe and Mail article supports the claim that the original TIPs from 1990 is now XIU, meaning XIU was the world's first ETF.
https://www.theglobeandmail.com/new...pled-the-mutual-fund-monoply/article34086222/


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## humble_pie

james4beach said:


> A bit off topic, but this Globe and Mail article supports the claim that the original TIPs from 1990 is now XIU, meaning XIU was the world's first ETF.
> https://www.theglobeandmail.com/new...pled-the-mutual-fund-monoply/article34086222/



the very same article clearly states that a 1989 US index product was the world's first. It was a precursor of SPY. Evidently it didn't last, it was done in by a lawsuit. But still, it was launched. It was da first.




> The United States took a shot at creating an ETF in 1989, a year earlier than Canada. However, the Index Participation Shares, a proxy for the S&P 500, were quickly withdrawn following a successful lawsuit from the Chicago Mercantile Exchange.



blackRock didn't launch XIU. That honour fell to barclay's global plc. Barclays are still actively managing within the blackRock empire. The present institutional blackRock sales desk in canada is, i believe, a division of barclays global.

last time i looked at the XIU records, they showed a launch date in 1999. I myself bought XIU in 2001, at a time when it was unheard of. IIRC XIU had a few siblings back then, there was a small initial barclay's canadian family of perhaps 6 or 8 ETFs. Also IIRC, at that time - dawn of the new millennium - barclays already operated a much larger ETF fund family in the US.

trivia, trivia .each:



.


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## james4beach

humble_pie said:


> I myself bought XIU in 2001, at a time when it was unheard of.


Lucky you! Assuming you bought it exactly 16 years ago, it's returned *6.8%* annually for you (including all divs & distribs), much better than even the S&P 500 in CAD.


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## humble_pie

james4beach said:


> Lucky you! Assuming you bought it exactly 16 years ago, it's returned *6.8%* annually for you (including all divs & distribs), much better than even the S&P 500 in CAD.




back in those days i was believing that ETFs really & truly do possess all the stocks that they piously claim they own .each:


.


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## Pluto

james4beach said:


> This kind of compounding is true for fixed income securities, but not for stocks. That dividend comes directly out of equity value. When you put it back into equity, it's a "null operation" ... nothing has changed.
> 
> There are many people out there who are finding high yielding stocks and DRIP'ing the distributions. It's pointless to do so, there is no compounding or amplification effect, because the dividends are not free money (not newly generated) to begin with.


consider the following comparason:
Portfolio 1: 

13 stocks commenced August 1, 2002. banks, piplines, utilities, and telecom. The usual dividend paying suspects. Start value 500,000.
today's value 2.75 million. A huge chunk is cash as dividends were not dripped or reinvested. 

Portfolio 2. Same stocks, same dates, same starting value but dividends are reinvested. (Actually only the first 9 stocks were included here because the website I use to calculate this pooped out on me. Hopefully I'll be able to complete it at a later date.)
today's value in the div reinvested portfolio: 4.32 million. 

So 2.75 mil for no reinvestment of dividends vs 4.32 with divs reinvested. 

Now I look at your analysis which concludes that reinvesting/dripping makes no difference, yet the facts state otherwise. There is in fact an amplifying effect. there is a type of compounding. 

so I don't really get what you are trying to say. 

On the one hand you have argued that equity is better than dividends. Then you argue the opposite, namely, that buying equity with the dividends yields zero effect. 
I don't get it.


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## Pluto

I should add that portfolio 2 - dividends reinvested, (as in post #146) since 2002 grew at a 15.5% annual compound rate. 
Portfolio 1 dividends not reinvested grew at a 12% rate. 

Clearly, reinvesting dividends is not a null effect.


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## AltaRed

Pluto said:


> I should add that portfolio 2 - dividends reinvested, (as in post #146) since 2002 grew at a 15.5% annual compound rate.
> Portfolio 1 dividends not reinvested grew at a 12% rate.
> 
> Clearly, reinvesting dividends is not a null effect.


Except the dividends not re-invested still have to be counted and re-invested elsewhere. You are not comparing apples with apples. It is quite conceiveable that had none of the stocks paid dividends at all over that period of time, the growth in retained and re-invested earnings would have resulted in capital appreciation as great, or greater (or less), than with dividends re-invested. The issue is ultimate end use of money. 

In the case where dividends are re-invested... the company either issues more stock to cover the DRIP or uses cash to buy back float to cover the DRIP.

In the case where there are dividends paid but not re-invested, the corp obviously does not have the cash either.

In the case where there are no dividends at all, the cash the company keeps is used to re-invest in organic growth, or to buy back shares, or horde for an acquistion.

The only real difference between all these is which method the cash is used can potentially provide the largest return. Any and all of those possibilities could be a winner.


----------



## james4beach

When you reinvest the stock dividends, you're just injecting the same cash back into equity. Money has come out of equity, then you put it back into equity. This is why I call it a null operation. You're not _adding_ to your investment, you're just preserving your investment from bleeding out value.

(The process is also not entirely efficient. You pay tax on that extraction process before you inject the cash back into equity)

Say there are two companies A and B that are identical in every way. The only difference is that A pays out zero dividend and B pays out 5% dividend. The stock of A will give the same total return as stock B with dividends reinvested. When you reinvest B's dividends, you end up with the same investment as A, but actually a little bit worse due to taxes.

Berkshire Hathaway is a company that does not pay dividends. If it did pay dividends, and if you reinvested all dividends, you would end up with exactly the same thing as the current BRK stock. If you don't believe me, see Buffett's explanation of this starting on page 19 of his 2012 investment letter:
http://www.berkshirehathaway.com/letters/2012ltr.pdf


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## james4beach

james4beach said:


> When you reinvest the stock dividends, you're just injecting the same cash back into equity. Money has come out of equity, then you put it back into equity. This is why I call it a null operation. You're not _adding_ to your investment, you're just preserving your investment from bleeding out value.


And by the way, when you do take the dividend as cash, you are steadily bleeding out value from your investment. Dividends are a convenient alternative to steadily selling off shares, but they amount to more or less the same thing.


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## AltaRed

james4beach said:


> And by the way, when you do take the dividend as cash, you are steadily bleeding out value from your investment. Dividends are a convenient alternative to steadily selling off shares, but they amount to more or less the same thing.


It is an indirect relationship though given market valuation fluctuations over time AND whether the corporation could have re-invested that cash more effectively (longer term ROCE or ROE) than what the investor is using it for and/or whether the investor may have been able to sell shares more effectively through a 'buy low, sell high' methodolgy. The theory gets really clouded by the 'noise' around the imperfect permutations, and in most cases, the retail investor is better off managing easily understandable scenarios, i.e. dividends. It certainly makes my life easier and more certain in retirement. IF there is a lazy way to do things, I would rather do it that way.


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## james4beach

I agree, the theory gets clouded. Dividends are a wonderfully simple way to steadily pay out value from the corporations. One could argue that the fact they pay out at regular intervals also helps, because otherwise investors might try to time the sales (time the market).

Like I've said a few times before, if I could just put $3 million into XIU, I'd be done. I'd get my 60K - 80K annual income for life, with inflation adjustment. There's nothing wrong with dividends.


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## Eder

If Berkshire started a 3% dividend payout I'm sure their stock price would rise 10% overnite.


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## like_to_retire

james4beach said:


> And by the way, when you do take the dividend as cash, you are steadily bleeding out value from your investment. Dividends are a convenient alternative to steadily selling off shares, but they amount to more or less the same thing.


James, you really have to abandon this old canard about dividends that you cling to. You're only looking at the math on paper, and ignoring all the other factors that make your belief a myth. Take a look again at this post by the very wise member, Doctrine. It's just one factor among many. Selling shares from a growth company is a heck of a lot different than taking cash in the form of a dividend from a blue chip company. It's simply is not "_more or less the same thing_".

ltr


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## james4beach

So you think Warren Buffett is wrong? Maybe you should send him a letter to correct his misunderstanding of dividends.

Additionally, when Berkshire class A shareholders voted on whether the company should start paying a dividend, the shareholders voted "no" by a margin of 89 to 1. It seems they agreed with Buffett, too.


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## AltaRed

James is right on a technical basis but that doesn't necessarily make it work in practice for the bulk of investors. Most investors in Berkshire are more sophisticated and understand Warren brings incremental value through re-investment. The average investor doesn't have the same patience nor opportunity to accomplish the same. 

There is a perception by investors that dividends add value and by definition, that will drive valuations higher on dividend paying stocks. It is what it is and a great many investors have done quite well with a dividend/dividend growth portfolio. There is nothing wrong with esentially using Tom Connelly's methodolgy or a facsimile of it and staying the course. More than one investing strategy works and that is the real lesson here.


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## gibor365

Eder said:


> If Berkshire started a 3% dividend payout I'm sure their stock price would rise 10% overnite.


True  , and in this case I'd probably buy BRK.B, as many investors who in retirement or close to it. In 1.5-2 years i plan to switch RRSPs to RRIFs and get minimum payments, I can do it easily from dividends, and I wouldn't be comfortable to sell BRK.B every month or quarter.



> James is right on a technical basis but


, but wrong on psychological side 



> when Berkshire class A shareholders voted


 Those who buys equity where 1 share = $270,000USD?! Those guys have different objectives . Curious who would vote BRK.B shareholders :courage:


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## james4beach

Well the vote on BRK.B (which are miniature shares) was similarly in favour of Buffett's advice, but I get your points and you guys are probably right. There are psychological factors and other things at play, and I'm often too literal on technical matters. However I stand by my claim that dividends are not new/free money, but simply a payment of the company's existing cash to shareholders. What the market thinks about that is another matter


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## gibor365

> I stand by my claim that dividends are not new/free money


 obviously, as wesay in Russian "the only free thing is a cheese in a ....mousetrap" , I just prefer getting "


> payment of the company's existing cash to shareholders


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## kcowan

james4beach said:


> What the market thinks about that is another matter


yes and there are stereotypes too, like the blue-haired old lady who holds Bell for the dividend, and the cowboys who want to get rich with Google.

Another stereotype is the employed who find dividends inconvenient having to constantly reinvest versus the retired who welcome the income without making any decision.


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## Pluto

james4beach said:


> When you reinvest the stock dividends, you're just injecting the same cash back into equity. Money has come out of equity, then you put it back into equity. This is why I call it a null operation. You're not _adding_ to your investment, you're just preserving your investment from bleeding out value.
> 
> (The process is also not entirely efficient. You pay tax on that extraction process before you inject the cash back into equity)
> 
> Say there are two companies A and B that are identical in every way. The only difference is that A pays out zero dividend and B pays out 5% dividend. The stock of A will give the same total return as stock B with dividends reinvested. When you reinvest B's dividends, you end up with the same investment as A, but actually a little bit worse due to taxes.
> 
> Berkshire Hathaway is a company that does not pay dividends. If it did pay dividends, and if you reinvested all dividends, you would end up with exactly the same thing as the current BRK stock. If you don't believe me, see Buffett's explanation of this starting on page 19 of his 2012 investment letter:
> http://www.berkshirehathaway.com/letters/2012ltr.pdf


1. Buffett doesn't say what you say. he says that BRK's reinvestiment of dividends into additional investments has made shareholders more wealthy than if BRK paid them dividends. But you say reinvestibng dividends is a "null operation", meaning, it has zero effect on the end result. I don't see in the reference you gave that BRK does not reinvest dividends because its a null operation. 
2. I think if you leave out the "null operation" phrase it would be less confusing, since, clearly, reinvesting dividends does help grow one's portfolio. 

As doctrine wrote, when you reinvest, in effect you get what you want - you get an investment where, in effect, no dividends are paid. 

In sum, I agree with what you say, except that the phrase "null effect" isn't accuratly portraying what you mean.


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## Pluto

AltaRed said:


> Except the dividends not re-invested still have to be counted and re-invested elsewhere. ... It is quite conceiveable that had none of the stocks paid dividends at all over that period of time, the growth in retained and re-invested earnings would have resulted in capital appreciation as great, or greater (or less), than with dividends re-invested.


1. pretty much true, I think. Therefore, reinvesting dividends is not a "null operation". 
2. When i was younger I mostly looked for companies that did not pay dividends, or a paltry amount, low or no debt, and fast growing. these were usually smaller companies, priced for perfection. Lots of retired people don't want all the drama and nail biting around earnings reports. They prefer a mature company with lots of assets, reasonable debt and a predictable coustomer base. Most of such companies, for better or for worse, pay a dividend. Its reality. 
3. Even as smaller non-dividend paying, fast growing companes are attractive to many investors, the larger ones with dividends reinvestied can still grow one's portfolio are an amazing clip. 15% componded rate of return over 15 years is very good, and a lot less drama. Once one reaches their goal, they can stop reinvesting and spend the dividend income.


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## AltaRed

Pluto said:


> Once one reaches their goal, they can stop reinvesting and spend the dividend income.


Indeed. My scenario in spades... except I never did DRIP. I took the dividends and made my own choices in where the divis were re-invested. Same end goal.


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## TomB16

AltaRed said:


> I took the dividends and made my own choices in where the divis were re-invested. Same end goal.


I've been doing that for several years but I have several small accounts with such small dividend yields that it would take a year or more to generate enough cash to make an efficient purchase order. In these cases, I've carefully selected stocks that I want to hold long term and set them to DRIP.

Interestingly, the DRIP accounts have almost grown as quickly as the accounts in which I manually allocate funds across the last few years.


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## OnlyMyOpinion

TomB16 said:


> I've been doing that for several years but I have several small accounts with such small dividend yields that it would take a year or more to generate enough cash to make an efficient purchase order. In these cases, I've carefully selected stocks that I want to hold long term and set them to DRIP.
> Interestingly, the DRIP accounts have almost grown as quickly as the accounts in which I manually allocate funds across the last few years.


^+1
For me, this *automatic, timely reinvestment* of small quarterly amounts into companies that I don't mind growing my position in - is THE big benefit of the DRIP. 
The alternative, letting the dividends grow to sufficient amounts over the course of a year or so and then deciding where and redeploying them on a timely basis is just not something I'm good at.


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## james4beach

I stumbled upon this nice article on dividend-focused investing. I agree with just about everything it says, and it has a really good section on pitfalls and traps to avoid:

https://www.simplysafedividends.com/living-off-dividends-retirement/

Some excerpts that I think are noteworthy:



> Dividend investing also provides flexibility to sell off assets if you need to fund special retirement activities or offset some unexpected dividend cuts. Once again, annuities typically lack this flexibility.





> Another way you could run into trouble with a dividend strategy is by only owning high-yielding stocks concentrated in one or two sectors, like consumer staples and utilities.


XDV is guilty of this, with 60% exposure to financial stocks.

And I think here is the big point:



> Most retirees cannot afford to live off of the income generated from their dividend portfolios every year without touching their capital. These investors should especially focus on designing a portfolio for total return rather than for dividend income alone. Once the portfolio’s objectives and stock and bond allocation are determined, you can figure out how to get the cash flow out of it, whether it’s through asset sales, interest payments, dividends, or something else. Dividend payments are one important way to generate consistent cash flow, but they shouldn’t be looked at in a vacuum.


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## like_to_retire

james4beach said:


> I stumbled upon this nice article on dividend-focused investing. I agree with just about everything it says, and it has a really good section on pitfalls and traps to avoid:


Yeah, thanks James, it was quite a good article.

One point I found interesting was the deviation from increasing your fixed income allocation as you age. In the article, the investor starts with a 60% equity / 40% fixed income allocation at the start of retirement, and then lives off a combination of dividends, plus sales of the fixed income portion. They carry this on for 21 years until the fixed income is completely gone, and the equities allocation is at 100% at age 81. This removes the investor from the ups and downs of the market over that time period and the necessity to sell shares in a down market. 

_"....you invest $400,000 into Treasury bonds and $600,000 into stocks that yield 3%, good for $18,000 in dividend income each year. After spending every dollar of dividends, you sell part of your bond portfolio to hit your $40,000 inflation-adjusted annual income target. After about 21 years, your bond portfolio would be fully depleted.

However, over that time period, your annual dividend income might have grown by a third to reach $24,000 per year, even after accounting for inflation. Most importantly, you would still own all your stocks. If your dividends grew by about a third after adjusting for inflation, it’s reasonable to believe that the value of your stocks could have appreciated by a similar amount, perhaps reaching close to $800,000 in value. Assuming you retired no sooner than the age of 60, you would now be in your 80s and have plenty of funds for the rest of your retirement"._

ltr


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## james4beach

like_to_retire said:


> Yeah, thanks James, it was quite a good article.
> 
> One point I found interesting was the deviation from increasing your fixed income allocation as you age. In the article, the investor starts with a 60% equity / 40% fixed income allocation at the start of retirement, and then lives off a combination of dividends, plus sales of the fixed income portion. They carry this on for 21 years until the fixed income is completely gone, and the equities allocation is at 100% at age 81. This removes the investor from the ups and downs of the market over that time period and the necessity to sell shares in a down market.


Yeah, they start with high fixed income, and eat through the fixed income.

This advice is completely in line with the latest guidance from Kitces and Pfau on "Rising Equity Glidepath"
https://www.kitces.com/blog/should-...is-a-rising-equity-glidepath-actually-better/

That's some of the latest research in the field. Kitces says the benefit comes from the high fixed income at the beginning of retirement protecting the retiree from the possibility of a serious bear market in the early years, which is the most harmful thing to a retirement portfolio.


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## james4beach

And here's what I understand of the Rising Equity Glidepath approach, for someone who is just about to enter retirement or just retired:

First, you boost your fixed income allocation way up into the zone of 50% fixed income. Probably a mix of bond funds and GIC ladders. In the early years of your retirement, you dig into those fixed income investments: extract cash from maturing GICs, sell bond funds, etc. The benefit is that these assets have low volatility. You deplete those while leaving your stocks alone. Once you eat up all that fixed income, maybe in a decade or two, you are now 100% in equities. Because you left those equities alone for about 20 years, they are almost assuredly higher and there was no danger of selling them during low prices. The fixed income is gone, and now you're living off dividends + selling stocks as needed.

Do I have this right?


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## AltaRed

For the most part, yes. 

I don't have any strong views on exact allocation percentages but I am reducing my FI allocation as I age (currently 68) by preferentially tapping into FI mostly when I need capital to supplement my spending needs (desires?). I never was as high as 50% with FI at the beginning of retirement 11 years ago, and I don't think I will ever be below 10%... simply because even at 80 years of age, I think I will still want a year or two of 'stable' capital (FI) in the portfolio to mitigate a 'bad' equity year. Time will tell.

No one says that one must follow the 'precise' strategy outlined by others, e.g. Kitces and Pfau.

Added: It is necessary to work with specific strategies (discipline) when accumulating a nest egg, but once one is into retirement, there can be a number of adjustments as one 'feels' their way in that new adventure (retirement). Much of it is 'what feels good' as to what is scientific or academic.


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## OnlyMyOpinion

Depending on your income needs and the dollar size of the FI portion of your portfolio, I don't see necessarily needing to boost your FI to 50%. You can stay at 30% or 40% if the FI is of sufficient size to fund your needs. 
Trying to do this 'per formula' might create a few years of unnecessary high captial gains for example.

Similarly, I think you could still shift some of the future growth in the EQ portion into FI during a good EQ year if your future income projections show it is prudent.

By necessity Pfau and Kitces have to limit their assumptions to a few fixed variables. I think it is acceptable to take their conclusions 'directionally' and apply them to your own unique situation.


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## james4beach

Yes I agree, they use simplifications and the numbers shouldn't be taken literally (they are assuming constant withdrawal schemes too).

The main point they are making, I think, is that it's good to start _relatively high_ on fixed income and start living off fixed income in the early phase of retirement. This provides more certainty and protects your stock holdings during the critical first decade of retirement. It's that first decade when you're extremely vulnerable to sequence risk, so this is a method to protect yourself by reducing sequence risk in the first decade.

Once you're into the later years of retirement, you're not as vulnerable to sequence risk, and so high stock allocations can't hurt you as much.


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## like_to_retire

james4beach said:


> The main point they are making, I think, is that it's good to start _relatively high_ on fixed income and start living off fixed income in the early phase of retirement. This provides more certainty and protects your stock holdings during the critical first decade of retirement. It's that first decade when you're extremely vulnerable to sequence risk, so this is a method to protect yourself by reducing sequence risk in the first decade.
> 
> Once you're into the later years of retirement, you're not as vulnerable to sequence risk, and so high stock allocations can't hurt you as much.


Agree. 

If you're not able to completely fund your retirement needs with dividends alone, and most aren't (as I understand), then the selling of those equities to make up the difference in your income requirements always struck me as bad idea. 

When I read about someone's strategy, where they intend to use whatever dividends they receive, plus selling equity shares for their retirement income, I just feel it's a bad plan. A few bad years in a down market will hurt them a lot. 

That "sequence risk", where you sell equities into a down market, that can go on for years, just never sat well with me. I like the idea of selling your fixed securities and using them for income needs over a long period from the start of retirement until they run out. You're shielded from a bear market. This allows the equity dividends to hopefully increase over that period, and also hopefully the share price to appreciate. 

When the fixed income is all depleted, then the equities are producing a higher dividend payout from dividend increases over many, many years, and the capital has increased to carry you through.

ltr


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## AltaRed

Provided of course if someone has the financial resources to do that. Few do. Many of us here are the exception.


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## like_to_retire

AltaRed said:


> Provided of course if someone has the financial resources to do that. Few do. Many of us here are the exception.


I don't really understand. If someone has a retirement portfolio, why wouldn't this strategy work?

ltr


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## AltaRed

Most people don't have the amount of capital to avoid taking 'down market' equity risk for a significant length of time. Think about someone with a $250k portfolio which is liklely generous for many. They have to use 4% SWR or similar, tapping capital as they go.


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## like_to_retire

AltaRed said:


> Most people don't have the amount of capital to avoid taking 'down market' equity risk for a significant length of time. Think about someone with a $250k portfolio which is liklely generous for many. They have to use 4% SWR or similar, tapping capital as they go.


So you're saying the fixed income portion would be depleted too soon to take full advantage of this strategy?

ltr


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## AltaRed

Possibly. Depends on one's draw from the portfolio and the amount of FI to begin with. I just don't think it is a given that most people could draw on FI only for 10 years (for example) before having to tap equity.

Added: The math would suggest that it should always be possible with a reasonable FI allocation but I sure have not run scenarios to test it.


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## OnlyMyOpinion

If I had $250k, an initial 4% w/d would be $10k. So if I put 40% ($100k) into a 10 year bond or strip ladder to allow me to spend $10k/yr (plus accrued interest), and kept the remaining 60% ($150k) in an equity etf that earned 4%/yr real after costs, it would be worth $222k after 10 years. Then I'd begin to dip into it?


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## AltaRed

Seems reasonable (similar mental calc I did without working an actual example) except... it one starts at 65, the issue then is that one is just 75 when the FI is gone, and can one really go another 15 years on straight equity? Maybe depending on how many and how deep are the down market years. I think if I was in that situation, I'd want to keep a one year lifeline in FI no matter what..... and not really dip into equity capital until circa age 80. This is where VPW methodology really comes into its own regardless of what capital is being tapped.


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## like_to_retire

AltaRed said:


> I just don't think it is a given that most people could draw on FI only for 10 years (for example) before having to tap equity.


OK, I see what you're referring to, but I thought we were looking at situations where someone had planned properly for retirement, and had a portfolio that they felt would take them through that retirement, and now we're looking at ways to do that. This isn't a tactic for someone who hasn't got enough retirement funds to execute any plan and will never make it, no matter what they do.

ltr


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## kcowan

like_to_retire said:


> This isn't a tactic for someone who hasn't got enough retirement funds to execute any plan and will never make it, no matter what they do.
> 
> ltr


Having been retired for 15 years, including 2008, I think most people are overly concerned about making their spreadsheets work in all situations.

(We found a totally out-of-plan situation solved our cash-flow problems. We bought a condo in Mexico and rented our penthouse in Vancouver. Would never have planned for that. But it has given us flexibility that we would never have expected! Granted it also keyed of the timing of deaths of some relatives. But that does happen to us all.)

We probably have too much FI now and look forward to working through some of it. We also have a grandfathered TDSP (Tax Deferred Savings Plan) which has served us extremely well. And the CPP/OAS x 2 plus company pension help a lot too.


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## AltaRed

like_to_retire said:


> OK, I see what you're referring to, but I thought we were looking at situations where someone had planned properly for retirement, and had a portfolio that they felt would take them through that retirement, and now we're looking at ways to do that. This isn't a tactic for someone who hasn't got enough retirement funds to execute any plan and will never make it, no matter what they do.
> 
> ltr


I agree...but sometimes it is necessary to state the basic assumptions, e.g. a properly planned retirement to begin with, so that there are not misunderstandings by a broader audience. The example provided upthread by OMO is a good reference point. I agree with the concept of reducing FI as one ages.


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## like_to_retire

AltaRed said:


> I agree...but sometimes it is necessary to state the basic assumptions, e.g. a properly planned retirement to begin with, so that there are not misunderstandings by a broader audience. The example provided upthread by OMO is a good reference point. I agree with the concept of reducing FI as one ages.


It's certainly an interesting strategy for retirement, but in keeping with informing the broader audience, this method is the complete opposite of standard recommendations that basically say, increase fixed income as you age.

I only started hearing about this concept in the last year (of increasing your equity as you move through retirement). I wonder if its birth was driven by the pitifully low returns from fixed income, or had no one actually thought about this method before. I suspect the former, and as such it seems like it may be considered an increase in risk, or at least a different kind of risk?

Admittedly, with such low fixed income returns, the retiree isn't able to grow their fixed income capital as all that interest paid would be going to income requirements. Alternatively, with dividend paying equities, there's the bonus of both share price and dividend increases hopefully keeping up with inflation. That just ain't gonna happen with the fixed income. By leaving the equities to grow without selling any shares for as long as possible, (until the fixed income runs out) seems like a decent idea though. It would make the starting allocation to fixed income that you would be burning up fairly important. Too little and it would run out before the equities had a chance to grow - too much and there wouldn't be enough equities to work with once the fixed income was gone.

ltr


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## AltaRed

I think it is the former (crappy returns on FI) and I do believe this 'new' strategy will increase risk due to inreasing concentrations into equities at potentially a critical point in one's life. That does not mean it does not have merit though.

I don't think enough analysis has been done, e.g. Monte Carlo simulations and backtesting similar periods in the past, to see whether failure rates with this strategy might increase over conventional wisdom. What are the critical boundary conditions on this strategy? It seems to me a pivotal one is the age (longevity risk) where FI is allowed to run to zero (or some other small number). Certainly there is exposure to Black Swan events if there is a brutal 'down' in equities about the time FI runs out and those who don't have a well padded portfolio cushion could suffer. We are getting used to 2000 and 2008 type 'downs' and not Great Depression type downs. Investors are getting confident that.....we will just ride it out for 2 years and we will be fine...and oh by the way, there won't be any substantial dividend cuts either. Maybe our global central bank system will 'prevent' downs any worse than the last two and if so, this new 'strategy' should work 100% of the time.

FWIW, I embarked on a loose definition of this strategy a few years into retirement, more from an intuitive (logical? or illogical?) sense than through any analysis. My career taught me to be careful of spreadsheet solutions and conventional wisdom. Lemmings still fall into the sea to this day.


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## TomB16

For someone looking at 35+ years of retirement, they need to have substantially more gains (dividends, passive income, market gains, etc.) than they need to live on at the outset because their basket of investments will have to grow for a period before the nest egg begins to lose to inflation and the withdrawal rate.

I'm not criticizing what has been written in any way. Some excellent ideas have been shared. I just wish to point out that things are a bit different when you're trying to project money nearly a half lifetime away.

The projections I've done have our nest egg growing for 25 of the 35 years of projected retirement and it still ends up at zero.

In order to retire and life for 35 years on FI and mutual funds, you would have to start with a pretty massive pot, no matter the withdrawal rate. Inflation will obliterate the nest egg over time.

If you want to retire early and live for a long time, you have to figure out how to earn returns in the range of 9+%. Otherwise, you will only be able to retire for a short period of time and you will endure diminishing buying power. When I model 5% average returns, it does not look good over 35 years, to say the least.

The time I have spent modelling various scenarios has lead me to believe that you either spend the huge amounts of time required to develop as a successful investor, or you have a short retirement. It's as simple as that.


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## james4beach

TomB16 said:


> If you want to retire early and live for a long time, you have to figure out how to earn returns in the range of 9+%. Otherwise, you will only be able to retire for a short period of time and you will endure diminishing buying power. When I model 5% average returns, it does not look good over 35 years, to say the least.


How are you going to get that > 9% return? Once you figure that out, share your method with all the pension funds in North America and you'll make millions.


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## kcowan

I wonder if the idea of the Fed printing money with almost zero interest rates has changed the dynamics of investing fundamentally.

That is my suspicion. It has never happened before.


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## TomB16

james4beach said:


> How are you going to get that > 9% return? Once you figure that out, share your method with all the pension funds in North America and you'll make millions.


I start by not contributing to any pension funds at 3~5% return.


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## olivaw

TomB16 said:


> I start by not contributing to any pension funds at 3~5% return.


My retirement plan is based upon earning 3% for the next 35 years with a coach potato mix of stocks, bonds and insured savings. (Inflation plus 1.5%). 

A >9% projection for 25 years seems so optimistic as to approach the realm of fantasy.


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## OnlyMyOpinion

TomB16 said:


> ...The projections I've done have our nest egg growing for 25 of the 35 years of projected retirement and it still ends up at zero...


Tom, I'm not questioning your projections or conclusions but I do admit that the above comment has me confused. If a portfolio has continued to grow for 25 years in retirement before starting to decline by drawdown, how does it become zero in just 10 years? I suppose it just depends on the size it has reached and the annual withdrawls you then make?

In any event, the link to Jason Heath's article than milhouse posted at the start of this thread points out that dying broke is actually the perfect plan (those wanting a last laugh like the idea of having the cheque to the undertaker bounce :eek-new.


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## TomB16

olivaw said:


> My retirement plan is based upon earning 3% for the next 35 years with a coach potato mix of stocks, bonds and insured savings. (Inflation plus 1.5%).


No doubt, my point of view is quite apart from the typical investor on CMF or anyone else I've read. Other CMF members should disregard my posts. Seriously.


First, I laugh at the idea of 2% inflation. The numbers the government publishes are straight up comedy.

List the things which have not doubled in the last 10 years: Gasoline. I can't think of anything else.

Groceries, house, rent, electricity has quadrupled, water, natural gas, groceries, bank fees, any fees, are through the roof. ... and yet, we have had inflation of 2~3% for the last decade? That's silly.

Real inflation is around 7%. It appears to have tapered off to about 6% the last few years. That's why the value of money halves each decade.

For a few years, I was mostly a couch potato so I understand your skepticism. I've been investing since the mid 1980s so I'm comfortable with my projections.

How are you going to make out in 35 years if the value of money continues to halve every decade like it has for the last century and your money only increases by 34% every 10 years?

I did the projections a long time ago and realized the only sure thing about fixed investments is they are guaranteed to fail. If I had invested in FI, low risk, investments, I would have pumped a lifetime of earnings into "safe" investments that, by the time I needed them, would have had a fraction of their original value.

One of the things about real estate investing is that real estate is the primary component in the cost of living. If you invest in real estate, you are buying an asset that is part of the inflation index. If you leverage it, you are going long on inflation. If real estate plumets, you have deflation. It can and has happened but the government works hard to make sure it doesn't happen. Deflation is extremely rare, compared to inflation. The government needs inflation for the country to run smoothly.

- By a house for $100K
- put $20K down
- as the rent goes up every 12~24 months, you bump up the payment.
- mortgage is retired in 11~14 years
- In 14 years, the house you put down $20K on is worth $260K. The mortgage is retired so you own all of it. That's a gain of 13.5x over 14 years or just over 20% annual return.

If I bought a house in Toronto at the peak of the 1989 bubble and sold the house in 2003, 14 years later, I still would have made out way better than a pension fund. My $200K house would have been worth about $225K in 2003 (14 years later) so my $40K down payment would have turned into $225K, earning right around 13%.

... and there are ways to make way more than that in real estate.


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## TomB16

OK, now that you're all angry at me and anxious to dismiss my point of view, let me dig the hole deeper. lol! 

My parents bought a 3 bed, 1 bath, bungalow for $9000 in 1967. It sold 2017 for about $300K. That's over 7% appreciation per year. ... but what does that mean?

Almost everyone will tell you the value of the house has doubled every decade. It hasn't.

In 1967. The value of the house was it's ability to provide a home for a family of 4. In 2017, the value is exactly the same.

What has happened is that, over the course of 50 years, the value of money has diminished, requiring more of it to purchase the exact same house.

When I think about retirement, I think about how I can put money away for retirement without it losing value. It doesn't have to be real estate. There are many other ways to transmit money efficiently into the future.

Real estate is hard work. It's not for everyone, to say the least. It's just an easy example of how to beat inflation. We are moving away from real estate, despite being treated extremely well by it over the last 25 years.


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## like_to_retire

TomB16 said:


> If I bought a house in Toronto at the peak of the 1989 bubble and sold the house in 2003, 14 years later, I still would have made out way better than a pension fund. My $200K house would have been worth about $225K in 2003 (14 years later) so my $40K down payment would have turned into $225K, earning right around 13%.


If you put a $40K down payment on a $200K house and ended with a $225K house 14 years later, it would have _appreciated_ by around 13%, not _earned_ around 13% on the investment. Either way, it came with a cost.

That $160K that was mortgaged on the investment was subject to around 13% mortgage rate in 1989 for 5 years, and likely ended with mortgage rates around 8% in 2000. That's a lot of vig to pay for an asset that only appreciated 13% in 14 years.

ltr


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## TomB16

like_to_retire said:


> If you put a $40K down payment on a $200K house and ended with a $225K house 14 years later, it would have _appreciated_ by around 13%, not _earned_ around 13% on the investment.


I assume you don't like what I'm saying so you are trying to correct me. The correction is incorrect.

Real estate is both an investment and a business. In this regard, the gains aren't purely investment returns, nor are they business earnings. They are hybred.

The house earned itself through the flow of money from rent payer to mortgage.

The house itself appreciated extremely little, during that time.




like_to_retire said:


> That $160K that was mortgaged on the investment was subject to around 13% mortgage rate in 1989 for 5 years, and likely ended with mortgage rates around 8% in 2000. That's a lot of vig to pay for an asset that only appreciated 13% in 14 years.


This is entirely incorrect. You have directly subtracted the mortgage rate from the investment gains. You do not understand the most basic aspects of real estate investing.

The asset did not appreciate 13% in 14 years. The house appreciated about 10% (using average closing price statistics I found on the web) across the entire time.

The interest is paid by the renter. Landlords do not subsidize renters for extended periods. It happens occasionally for short durations but there aren't many people willing to subsidize the housing of others. As rates go up, so follows rent.

You don't subtract interest from net earnings. That's already been baked in.

Also, I bought my first apartment block in the mid 1990s. I've never paid 8% or even all that close.


I was illustrating that a worst case scenario still netted a pretty solid return. If you can and are willing to do the work, R-E can be extremely profitable. Most people can't, so R-E investing is often a mistake.


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## olivaw

Tom is right. I have friends who experienced bad returns in the market and have turned to rental homes. The math can look fantastic. You leverage at today's low mortgage rates, find a tenant to cover the costs and watch your investment grow at 4 times the rate of inflation. That's the theory, anyway but it doesn't always work out 

It takes a very special kind of person to deal with with market fluctuations, unexpected repairs, vacancies, bad tenants angry neighbours (who don't like your renters), taxes etc. Despite the risk, some people manage to do well. 

Others do well with leveraged investments in REITS or dividend stocks. 

It took me so long to become debt free that I have no interest in leveraged investing. If my savings aren't enough, you'll find me greeting folks in Walmart.


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## milhouse

TomB16 said:


> First, I laugh at the idea of 2% inflation. The numbers the government publishes are straight up comedy.
> 
> List the things which have not doubled in the last 10 years: Gasoline. I can't think of anything else.
> 
> Groceries, house, rent, electricity has quadrupled, water, natural gas, groceries, bank fees, any fees, are through the roof. ... and yet, we have had inflation of 2~3% for the last decade? That's silly.
> 
> Real inflation is around 7%. It appears to have tapered off to about 6% the last few years. That's why the value of money halves each decade.
> 
> For a few years, I was mostly a couch potato so I understand your skepticism. I've been investing since the mid 1980s so I'm comfortable with my projections.
> 
> How are you going to make out in 35 years if the value of money continues to halve every decade like it has for the last century and your money only increases by 34% every 10 years?...


Estimating increases in cost of living is kind of tricky. 
Services seem to have definitely increased faster than the stated inflation. Hydro bill, Gas bill, car insurance, etc. And I have to admit, these are kind of core costs.
Manufactured item (like overseas and automation) seem to have stayed relatively cheap. I don't know why this story sticks with me but I remember buying a long sleeve button up shirt about 25 years ago for $30 from Big Steel. I'm pretty sure I can buy a similar shirt nowadays for about $30 (if not $20 at Costco). Electronics have generally stayed pretty cheap comparatively. I bought my 55" flat screen from Best Buy 10 years ago during Boxing Day for about $750 and can get a 55" with better options today from Costco.
Travel is kind of an odd ball. In 2009 we paid $930 for a trip to Japan. In 2015 we paid $850. And there are so many deals. We don't see the same Priceline hotel deals like we did 10 years ago though. 
Both our grocery and eating out bill has remained pretty consistent for the last 4 years. 

I only have 4 years (including this partial year) of detailed spend data so I can't really give a good trend. But our core spend (excluding travel) has been pretty consistent. In 2014 our core spend was $31k. This year is estimated to be $32.5k. We do make adjustments though like increasing a deductable, installing LED lights, etc


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## TomB19

olivaw said:


> I have friends who experienced bad returns in the market and have turned to rental homes.....


Excellent post, olivaw. Every aspect.

Only My Opinion: please question my numbers or ideas. That's why we are here. I feel this forum would be well served with less defensiveness and more objective criticism. I invite it.

If inflation really is 3% or less, my wife and I will be able to throw a Weiner in with the Kraft dinner this christmas. Lol!


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## TomB19

Further....

I'm not trying to hype r-e. Far from it.

The thrust of what I am presenting is that inflation is higher than indicated and earnings need to be higher than inflation to efficiently fund a retirement.

I am not joking when I say that, if I could only make 2.5% returns, I would leave retirement savings for the last moment.

This thought process of the effects of inflationary erosion has pushed me out of my comfort zone to seek higher returns.


----------



## Mukhang pera

TomB16 said:


> First, I laugh at the idea of 2% inflation. The numbers the government publishes are straight up comedy.
> 
> Real inflation is around 7%. It appears to have tapered off to about 6% the last few years. That's why the value of money halves each decade.


You are absolutely correct on those points.



TomB16 said:


> My parents bought a 3 bed, 1 bath, bungalow for $9000 in 1967. It sold 2017 for about $300K. That's over 7% appreciation per year. ... but what does that mean?
> 
> Almost everyone will tell you the value of the house has doubled every decade. It hasn't.
> 
> In 1967. The value of the house was it's ability to provide a home for a family of 4. In 2017, the value is exactly the same.


Correct again, which has long made me wonder why Canadians keep putting up with "capital gains" tax. My parents did much the same as your folks. Bought a Toronto house in 1950 for $20,000 and sold it in 1997 for $511,000. It was their principal residence, so no tax. But, it could just as easily have been a rental house, in which case the CRA would say, Oh, you lucky buggers, you have realized a "gain" of $491,000 and now you must give much of it over to tax. But, what gain was there? In 1950, $20,000 would buy an ordinary family home in Toronto. In 1997, $511,000 was needed to buy exactly the same thing. If you had to pay tax on the so-called "gain", you would not be able to buy back what you had. But we keep voting for people who plunder us remorselessly.


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## RBull

Tom, 

Put me down as someone who is not experiencing anywhere near 6 or 7% inflation. I don't know what it is exactly for us but I would agree it's likely higher now than CPI suggests, but not by a lot. Where it's going no ones knows but I've explained my idea in the other thread by OMO. 

In response to your question about what has not doubled in 10 years for us; simple - it's nothing. We only have 4-6 years of reliable expense info but have paid good attention to it for many years. (wife has food/sundries costs over 28 yrs) No doubling here- not house prices, not rent, not groceries, not electricity, not gas, not property taxes, not gym memberships, not tv's, not cable or internet, not clothes, not car insurance, not cars or SUVs, not labour rates at car dealer, not bank fees, not beer (very important) and on I could go. Most of these not even close to doubling. Travel now makes up about 35% of our spend in retirement but is a different animal to compare, as IMO it's near impossible to compare different destinations/experiences for cost increases. I accept my experience may be quite different from others on here. Some of that may be explained by where I live - East Coast where generally things are nearly always little depressed compared to most of the country and we don't have the big boom bust thing going on- we keep muddling along. Cost of living isn't low though, especially considering wages.

It sounds like moving away from real estate at this stage in the cycle and going into retirement may be a very good thing for you, assuming you've figured out what is going to give you the ROI you need/want. (and from what I've read of your posts I expect you have) If you can do that given your inflation assumptions I'm guessing you'll have a pretty incredible retirement. I'll be contacting you to find out what I can do to juice up my returns...especially if our inflation really ramps up...

Perhaps you can help clear things up with a response to #191.


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## gaspr

milhouse said:


> There's been a number of articles discussing earning up to around $50k of dividends tax free* (*with no other income and province dependent) per person yielded from Canadian equities. A few that have resonated with me around trying to achieve this goal for a core income stream in retirement have been:
> 
> Jonathan Chevreau wrote about it on his Findependence website and Financial Post.
> 
> John Heinzl has written about it in the G&M.
> 
> Jason Heath has written about why it may potentially be a mistake living off of dividends in retirement.
> 
> What do you think about this strategy for a core income stream in retirement? It's obviously situational dependent with tax implications and such. There's also obviously risks around having so much of your nest egg allocated to Canadian equities.
> Is anyone out there in retirement hitting $50k in dividends? If so, how is it working out for you from various perspectives: like peace of mind, taxation, gross-up impacting OAS & other means tested benefits, etc.


I question the whole premise that 50k in dividend income is "tax free". Before you receive a dividend, the issuing company has already paid tax on your behalf...(26.5% for an ON based company). Eligible dividends are partially after tax money. This is the whole reason that the gross up/dividend tax credit exists. The CRA is giving you credit for the corporate tax you have already paid. When a proper accounting is done, as shown here, there is no reason to prefer dividends over regular income (RRIF's or interest income), no matter what tax bracket you happen to be in!


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## OnlyMyOpinion

gaspr, I think milhouse' point was that it is tax-free at the individual's level. That is, I can report $50k of eligible dividend income and if that is the only income I have I will pay no personal taxes on it. 
In fact the article that you linked to notes this in its first 'Planning Ideas' bullet. 

Note also that their example says, _"Total tax cost: $366 ($101 personal** and $265 corporate)"_ versus the $350 of personal tax that you would pay on regular income.

You are correct that when fully considered, it is not free of taxes as the company has already paid corporate taxes, and arguably your share ownership is in a company that is 'encumbered' by paying taxes. As your article also points out, you need to understand whether the dividend gross up will create issues with OAS clawback.


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## gaspr

@OPO Agreed. I just object to calling the 50k "tax free" because it is in fact not. The implication is that one can compare eligible dividends to regular income on a dollar for dollar basis. This is not a fair comparison because of the fact that divies are after tax (corporate) income. As the article 's example shows, 1000 dollars of regular income (RRIF for example) should be compared to 735 dollars of dividend income before doing a personal tax comparison. When this is done as it should, the so called tax advantages disappear completely, and shows that there should be no preference to dividends. Again, this applies at all marginal rates.

To further my argument, consider how one would look at dividends received from a CCPC. In this case the tax is paid before any dividend can be made. Then the gross up and dividend tax credit is applied at a personal level. The very same principle is in place for public companies. I argue there is no tax advantage...it is an illusion.


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## AMABILE

I can report $50k of eligible dividend income and if that is the only income I have I will pay no personal taxes on it. 

I can't believe that anybody would have $50k of dividend income and " NO OTHER INCOME "

Is this possible?


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## like_to_retire

gaspr said:


> I argue there is no tax advantage...it is an illusion.


This subject certainly comes up repeatedly, and I do understand both sides of the discussion, but: I prefer dividends over interest returns.

For myself, I don't compare $1000 of interest income with $735 of dividend income. Simply because, in practice it makes no economic or practical sense to me. I'm just not that concerned with the jiggery-pokey that goes on before I receive a payment from an investment. 

If I receive $1000 interest, I know what I will have to pay the government. If I receive $1000 of dividends, I also know what I will have to pay the government. That's pretty powerful stuff that over-rides the math of corporate tax and how much they have to pay before they offer me the $1000. Maybe my naiveté on the subject has a lot to do with the fact that interest returns are so paltry (2-3%) and the dividends are so much more (3-5%). Hard to say - maybe I'm just not the sharpest tool in the shed.

I just looked at $1000 interest income added to my tax software and see that I would pay the government $442. That's 44.2% of my proceeds.
I then looked at $1000 dividend income added to my tax software and see that I would pay the government $264. That's 26.4% of my proceeds. This includes the full weight of more OAS clawback.

Why would I choose interest income in this example? 

Would most CMF investors say that it doesn't matter in this case? 

Am I an anomaly in preferring dividends over interest income??

ltr


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## Eder

AMABILE said:


> I can report $50k of eligible dividend income and if that is the only income I have I will pay no personal taxes on it.
> 
> I can't believe that anybody would have $50k of dividend income and " NO OTHER INCOME "
> 
> Is this possible?


I'm pretty close...I get CPP to declare other than that pretty much all eligible dividends ( my fixed income is in RRSP )


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## gaspr

like_to_retire said:


> This subject certainly comes up repeatedly, and I do understand both sides of the discussion, but: I prefer dividends over interest returns.
> 
> For myself, I don't compare $1000 of interest income with $735 of dividend income. Simply because, in practice it makes no economic or practical sense to me. I'm just not that concerned with the jiggery-pokey that goes on before I receive a payment from an investment.
> 
> If I receive $1000 interest, I know what I will have to pay the government. If I receive $1000 of dividends, I also know what I will have to pay the government. That's pretty powerful stuff that over-rides the math of corporate tax and how much they have to pay before they offer me the $1000. Maybe my naiveté on the subject has a lot to do with the fact that interest returns are so paltry (2-3%) and the dividends are so much more (3-5%). Hard to say - maybe I'm just not the sharpest tool in the shed.
> 
> I just looked at $1000 interest income added to my tax software and see that I would pay the government $442. That's 44.2% of my proceeds.
> I then looked at $1000 dividend income added to my tax software and see that I would pay the government $264. That's 26.4% of my proceeds. This includes the full weight of more OAS clawback.
> 
> Why would I choose interest income in this example?
> 
> Would most CMF investors say that it doesn't matter in this case?
> 
> Am I an anomaly in preferring dividends over interest income??
> 
> ltr


If you are going to continue to compare personal taxes paid on $1000 of pretax interest income to $1000 of after tax dividend income then you will always make the wrong choice from a total tax efficiency point of view. You can't ignore the jiggery-pokey. The dividend tax credit on your personal return is there to approximately compensate you for what the company has paid in tax on your behalf.


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## like_to_retire

gaspr said:


> If you are going to continue to compare personal taxes paid on $1000 of pretax interest income to $1000 of after tax dividend income then you will always make the wrong choice from a total tax efficiency point of view. You can't ignore the jiggery-pokey.


Alright then, I'll choose the incorrect route and continue to put more money in my pocket.

ltr


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## OnlyMyOpinion

like_to_retire said:


> Alright then, I'll choose the incorrect route and continue to put more money in my pocket.
> ltr


I'm with you on this one. We are talking about personal income tax as it effects our sources of income. What the company has paid, what they have written off, deducted, blah, blah .... is of no consequence to my personal tax - only whether it is called an eligible Canadian dividend.


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## milhouse

I'm not discounting the fact that certain items like services, utilities, properties taxes, etc. has seen possible inflation in the 6% range. But effectively, it hasn't seemed to blow up our annual spend numbers. We've only tracked most of our numbers in detail for 4 year but some close to a decade. 
Granted we have made what can be considered one time adjustments that reduce our spend and/or make our spend more efficient but it seems we're constantly finding ways to do so and it's not impacting our quality of life. 

---

Re: Are dividends truly tax free? 
I wasn't trying to get to that technical and with the finer details other than acknowledging that there are implications like gross-up but fine by me if conversation wants to go that route. 
For me, I'm just looking at it from a simplistic approach. $50k hits the upper bands of our current annual spend. Being able to generate $50k income stream in dividends to support our annual spend and not having to consider taxes, generally speaking, is kind of a cool concept for me but obviously with its own set of risks and cons. There seems to be a number of people on the dividend growth strategy train. 

Re: Is it possible to have $50k in dividend income and not other income?
That's the _kind of_ the plan when I retire at age 50. I'm currently trending to be able to generate $50k in dividends in my non-reg'ed account when I retire. Obviously a lot can happen between now and then (4.5 years'ish). I'll have an RRSP, DC pension, TFSA, and some cash savings. If I don't start burning down my RRSP (as Steve41 kind of indirectly suggests ), I'd have no other income other than maybe a little bit of interest from my savings. 
Right now, I'm obviously paying taxes on my dividends on top of my work income.


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## kcowan

It nets out to a question of yield. If gaspr puts his money in a GIC paying 3.6% and LTR puts the same amount in TD stock paying 3.6% in divvies, who is better off at tax time?


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## like_to_retire

kcowan said:


> It nets out to a question of yield. If gaspr puts his money in a GIC paying 3.6% and LTR puts the same amount in TD stock paying 3.6% in divvies, who is better off at tax time?


Absolutely agree kcowan. I try not to get too involved in all the questions of internal workings of companies and their corporate taxes or total tax efficiency point of views. I have always been a big believer of adding a theoretical $1000 to my total income using tax software and seeing what I have to pay the CRA. This quickly and accurately tells me what a new investment is going to cost me and the net I'll realize. I can't imagine what else I would be concerned with when it comes to investing.

ltr


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## gaspr

kcowan said:


> It nets out to a question of yield. If gaspr puts his money in a GIC paying 3.6% and LTR puts the same amount in TD stock paying 3.6% in divvies, who is better off at tax time?


Lets add a third choice. How about a stock that pays no dividend, but whose total return is identical to TD. :calm: I'll take the zero yield stock.


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## like_to_retire

gaspr said:


> Lets add a third choice. How about a stock that pays no dividend, but whose total return is identical to TD. :calm: I'll take the zero yield stock.


Yeah, although you're completely changing the topic for some reason, I'll agree that for a young investor it's an advantage to choose unrealized deferred capital gains, than to pay yearly taxes on dividends as they build their portfolio.

ltr


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## gaspr

like_to_retire said:


> Yeah, although you're completely changing the topic for some reason, I'll agree that for a young investor it's an advantage to choose unrealized deferred capital gains, than to pay yearly taxes on dividends as they build their portfolio.
> 
> ltr


Can I ask why that is an advantage to only a young investor? As a retiree, if you need income, simply make your own dividend by selling a few shares.


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## like_to_retire

gaspr said:


> Can I ask why that is an advantage to only a young investor? As a retiree, if you need income, simply make your own dividend by selling a few shares.


And if those shares that you have to sell to create income, happen to be in a two or three year bear market, at a drop of 40% during the first few years of retirement, compared to simply receiving a dividend and not having to sell shares, do you see any difference? Have you read about sequence of returns?

ltr


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## AltaRed

gaspr said:


> Can I ask why that is an advantage to only a young investor? As a retiree, if you need income, simply make your own dividend by selling a few shares.


Stirring up the pot, are you? Pure heresy to suggest that in this thread!


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## gaspr

I guess I am. I had better lay low for awhile...:cool-new:


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## Joebaba

OK – let’s unchange the topic and go back to Dividends versus Interest.

In order to make it a fair comparison, we have to make the assumption that both investments have the same gross return – 4%.
And we’ll assume a personal tax bracket of 35%.

Gaspr owns a $100,000 GIC with BMO that pays 4% per annum.
LTR owns $100,000 of stock in company XYZ. He is the sole shareholder.
XYZ earns a return on equity of 4%.

Gaspr’s GIC pays him $4,000. Come tax time, he pays CRA 35% of the $4,000, or $1,400.

This leaves Gaspr an after tax return of $2,600.

LTR’s XYZ Corp earns 4%, thus producing $4,000 of income.
XYZ Corp then has to pay CRA the corporate tax rate of 26.5%, or $1,060.
This leaves XYZ Corp $2,940 available to pay out in dividends.
XYZ Corp sends LTR a cheque for $2,940.
Come tax time, LTR then grosses up his dividend by 38%, so for tax purposes, he reports income of $4,057.20.
His tax owing is then $4,057.20 times 35% which is $1,420.02.
But before he pays CRA, he gets the dividend tax credit - which is 25% of the grossed up amount.
So his dividend tax credit is $4,057.20 times 25%, or $1,014.30.
So has to pay CRA $405.72 ($1,420.02 less $1,014.30)
So he starts with a dividend cheque of $2,940, and pays CRA $405.72.

The leaves LTR an after tax return of $2,534.28.
*
Gaspr with his GIC takes home $2,600.00*
*LTR with his dividend takes home $2,534.28*

That’s with no worries about Bear markets – no concerns about dividend cuts – no adjustments for OAS clawback. Just dividends versus interest.

Full disclosure – I’ve copied the basis of these calculations from a post by Stephanie Dietz on Advisor.ca. Which ironically, Gaspr posted over on the Financial Wisdom Forum a few weeks ago.
http://www.advisor.ca/tax/tax-news/all-about-dividend-taxation-231498

I must admit, when I first saw Ms. Dietz’ post, I was very sceptical. But after doing a few calculations I have to agree with her conclusions.


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## gaspr

:dread: Nice explanation...be prepared to duck.


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## like_to_retire

Joebaba said:


> In order to make it a fair comparison, we have to make the assumption that both investments have the same gross return – 4%.
> 
> Gaspr’s GIC pays him $4,000.
> 
> XYZ Corp sends LTR a cheque for $2,940.80


Again, the assumptions aren't realistic or practical. 

I'll even spot you the impossible notion that you can find a GIC that pays 4%. 

But, where in this practical world does a company that pays a 4% dividend, suddenly send me 2.9% in cash. It just ain't so.

If by some miracle I could find a GIC that paid 4%, then they would send me $4000.

Then I would match that against a company that paid a 4% dividend, and here's a surprise, they would send me $4000 - Imagine that.

Now, tell me who ends up with more cash after tax time.

Sheesh, you guys are living in a dream world.

ltr


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## Joebaba

Now who's changing the topic.
The simple fact is, that after a company pays tax on their earnings, then pays you a dividend, and you pay tax on that dividend, your after tax return is almost the same as interest income.


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## AltaRed

Joebaba said:


> Now who's changing the topic.
> The simple fact is, that after a company pays tax on their earnings, then pays you a dividend, and you pay tax on that dividend, your after tax return is almost the same as interest income.


Yeah, but you are not being realistic in your comparison, meaning the company pays you a 4% yield which is after tax for them (higher than 4% BT if they are taxable but you don't care). So what you see and get is 4%. What you, as an individual are now comparing that with, is interest income of 4%. As an individual receiving 4% eligible dividend income, or 4% interest income, it makes a difference in a non-reg account.


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## Joebaba

Hey AR,

I understand your point about yield - but in post #212, the question was raised
" If gaspr puts his money in a GIC paying 3.6% and LTR puts the same amount in TD stock paying 3.6% in divvies, who is better off at tax time?"

Well my point is, assuming that TD pays out all it's earnings in that 3.6% dividend, in order for TD to pay the corporate tax and the 3.6% dividend, they actually have to come up with 4.9%. So the stock would in fact drop by 1.3ish%. So after paying the personal tax next April, and figuring in the value of the stock drop, Gaspr is actually better off.

If the argument is that TD would have an ROE of more like 12%, then we don't have an apples to apples comparison.

A much better comparison would be to compare a dividend paying stock, versus one that doesn't pay dividends, both with the same ROE. I am 100% confident that the non-dividend payer will be the winner when it come to tax. But LTR's argument, is that he doesn't want to sell in a bear market. That is a reasonable concern.

But from a pure tax point of view, dividends aren't the magical entity so many people think they are. They forget that the stock price goes up less than it should, or drops more than it should, due to the dividend payout.

Joe


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## Joebaba

Hey LTR,

I don't think I said XYZ Corp pays a 4% dividend. Rather I said they earned 4%, and then paid it all out after corporate tax.
So you ended up with the cheque for $2,940.80.

Joe


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## Eder

I buy a TD GIC @ 4%...TD needs to pay me that 4% from its gross earnings...TD pays me 4% divy from it's after tax earnings. I don't care if they pay me from their bed mattress...I take home more money receiving the dividend. (In my case I pay no tax on the dividend.)

Now you say that paying a dividend of 4% cuts TD's share price by the same amount?? Can you imagine what TD's share price would be if they cut the divy to zero? Probably down 25% the same day.

The fact is good stocks worth owning begin paying a dividend soon and tend to increase the dividend. It's a great metric to use for retail investors as the dividend increases are hard to provide if the business has some fleas.


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## AltaRed

Eder said:


> I buy a TD GIC @ 4%...TD needs to pay me that 4% from its gross earnings...TD pays me 4% divy from it's after tax earnings. I don't care if they pay me from their bed mattress...I take home more money receiving the dividend. (In my case I pay no tax on the dividend.)
> 
> Now you say that paying a dividend of 4% cuts TD's share price by the same amount?? Can you imagine what TD's share price would be if they cut the divy to zero? Probably down 25% the same day.
> 
> The fact is good stocks worth owning begin paying a dividend soon and tend to increase the dividend. It's a great metric to use for retail investors as the dividend increases are hard to provide if the business has some fleas.


Not a fair comparison. TD's share price may be way higher (orders of magnitude) if it had NOT ever paid a dividend and re-invested that capital into double digit ROE growth. Talk about a momentum/growth stock to own! Trouble is.... most corps tend to fail miserably on ROE when they have too much cash to deploy (cannot do it effectively) so theoretical examples by big businesses are just that...theoretical. It's not worth the bytes it takes to say it.

Shareholders pay Berkshire to re-invest its capital into double digit ROE returns and thus no dividend. It's been a successful model for the most part though there are warts showing in that monolith. Too big now?


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## Joebaba

Hey Eder,

They don't usually pay the full 4% (or 5 or 6 or whatever) all at once of course. Rather it's typically quarterly.
But regardless, yes it is my belief that if TD pays out a 4% dividend over the course of a year, then the stock price will be 4% less than it would have been if they hadn't paid the dividend.

You might find this article interesting.
http://obliviousinvestor.com/do-dividend-stock-funds-belong-in-your-portfolio/

Joe


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## Joebaba

A further example is Microsoft. They didn't pay dividends until 2003. And we all know how they made out before that. Ironically, it was after they started paying dividends, that they started to lumber. I'm not saying that's cause and effect. Rather, I think they just got so large, they found it hard to reinvest their capital, so started to pay it out as dividends. But that's just my take, with no absolutely evidence to support my case.


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## OnlyMyOpinion

This thread is becoming badly frayed.
Arguments trying to compare taxes on gic income in the hands of an individual to dividends in the hands an individual PLUS the corporation are nonsensical and totally off topic.
Let's not now try to argue share value effects - there is another thread for that.
What began as an interesting thread discussion has become frankly ridiculous. OMO of course.


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## Joebaba

I'm down with that - signing off this thread now.

Joe


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## Eclectic12

gaspr said:


> Joebaba said:
> 
> 
> 
> ...In order to make it a fair comparison, we have to make the assumption that both investments have the same gross return – 4% ...
> I don't think I said XYZ Corp pays a 4% dividend. Rather I said they earned 4%, and then paid it all out after corporate tax.
> So you ended up with the cheque for $2,940.80 ...
> 
> 
> 
> :dread: Nice explanation...be prepared to duck.
Click to expand...

I can see where this would come into play where one is sole owner/shareholder that controls the types of income paid and amounts.

Being a retail investor, the stock is a tiny slice of a much bigger company where there is no control over these items. The decision being made between the GIC and stock is not "4% GIC versus 4% earnings trimmed to 2.9% dividends" but GIC rate versus *after-tax* dividend rate based on the buy price.




Joebaba said:


> ... in post #212, the question was raised
> " If gaspr puts his money in a GIC paying 3.6% and LTR puts the same amount in TD stock paying 3.6% in divvies, who is better off at tax time?"


Stock ... unless one can change what the stock company is doing.
Keep in mind that if it is a multiyear GIC that does not pay out the interest until the end, one will have to front the tax on the GIC from other sources to pay year by year until the end of term payment.




Joebaba said:


> ... Well my point is, assuming that TD pays out all it's earnings in that 3.6% dividend, in order for TD to pay the corporate tax and the 3.6% dividend, they actually have to come up with 4.9%. So the stock would in fact drop by 1.3ish%. So after paying the personal tax next April, and figuring in the value of the stock drop, Gaspr is actually better off.


From a pure tax perspective, maybe ... from an after-tax, what can Gaspr use, no.

It seems to me that the place where Gaspr could be ahead is where Gaspr controls the stock company, which I doubt is happening with TD.




Joebaba said:


> ... If the argument is that TD would have an ROE of more like 12%, then we don't have an apples to apples comparison.
> 
> A much better comparison would be to compare a dividend paying stock, versus one that doesn't pay dividends, both with the same ROE. I am 100% confident that the non-dividend payer will be the winner when it come to tax ...


But that's thing ... having a 4% or 10% or 6% dividend when compared to trading prices says nothing about what the underlying business ROE is.

While I agree it would be good to compare dividend paying stock to non-dividend paying stock, it is hard to find similar sized companies in the same business as management typically wants to compete with the other dividend paying companies. Feel free to point out which similarly sized to TD bank Canadian bank does not pay dividends.




Joebaba said:


> ... But from a pure tax point of view, dividends aren't the magical entity so many people think they are. They forget that the stock price goes up less than it should, or drops more than it should, due to the dividend payout.


So what you are saying is that market sentiment is dwarfed by the dividend payout mechanics?
The -30% drops across all but a few stock during the 2008/2009 crash suggest otherwise. Or the concerns about investors chasing dividends to drive up share prices more than the business warrants suggests dividend payout are not the end all and be all to the returns.


Cheers

Joe[/QUOTE]


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## AltaRed

Eclectic12 said:


> So what you are saying is that market sentiment is dwarfed by the dividend payout mechanics?
> The -30% drops across all but a few stock during the 2008/2009 crash suggest otherwise. Or the concerns about investors chasing dividends to drive up share prices more than the business warrants suggests dividend payout are not the end all and be all to the returns.


That, of course, has always been the debate between dividend paying stocks and those not paying dividends. In today's environment of low interest rates, I'd argue investors have driven up share prices higher than they otherwise should. Manifests itself in P/E multiples in a noisy (relatively undefined) way. Maybe not so much when/if interest rates go back to historical norms. If/when that happens, we will see valuation compression and of course, lower earnings in any event due to higher debt servicing costs.

I am guilty of having a portfolio with a majority of my Cdn equities being good yield dividend paying stocks rather than a majority of zero/low yield dividend paying stocks. Have I paid too much for those stocks? I won't know until the interest rate hammer comes down over time (likely a case of the boiling frog). But I am consciously aware I may experience a very sideways market for some time with low/zero dividend growth and minimal capital appreciation if/when that day comes. The best way I know of to counter that possibility is to prefer stocks with solid double digit ROE in the hope that debt servicing does not then drive ROE down well into single digits.


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## RBull

OnlyMyOpinion said:


> This thread is becoming badly frayed.
> Arguments trying to compare taxes on gic income in the hands of an individual to dividends in the hands an individual PLUS the corporation are nonsensical and totally off topic.
> Let's not now try to argue share value effects - there is another thread for that.
> What began as an interesting thread discussion has become frankly ridiculous. OMO of course.


Couldn't agree more. :encouragement:


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