036: Dividend Investing | Tawcan

Money Mechanic
Hello, listeners. Welcome to Explore FI Canada, where we sit at the roundtable with Canadians, and share their thoughts, ideas and personal journeys to financial independence.

All right, here we are. Explore FI Canada, Money Mechanic with you. And of course, my friend Chrissy.

Chrissy
Hello, how are you doing Money Mechanic?

Money Mechanic
Well, I have to say I’m glad we’re recording in the basement today. I should have actually just moved into my garage because it’s the coolest out there is a hot summer day. So I hope everybody got outside, enjoy that and they’re listening to this, maybe on a car trip to somewhere fun and stay away from everybody else. But we are going to have a guest on the show today. So I always introduce the guests. It’s your turn.

Chrissy
All right. So our guest today is someone that we’ve known for quite a while, and he’s been in our community for a long time and has his own blog. And that would be Bob Lai from Tawcan. Welcome.

Bob
Hey guys. How’s it going?

Chrissy
Good. How are you?

Bob
Good. It’s sure is hot.

Chrissy
It is. Yeah, I am on the top floor of my house. And it’s toasty in here with the computer on and the windows shut because there’s construction outside so I am baking.

Money Mechanic
I’m hiding. I’ve moved the bed and sleep downstairs with the dogs this time.

Chrissy
Yeah, we did that last night. It’s so much better.

Money Mechanic
But no complaints because we’re on the West Coast and it’s nice to have a hot summer day for change. And hopefully it’s still hot by the time this gets released and listeners are listening. So Bob, great to finally have you on the show and we are considering you an expert of sorts tonight. So you can fill our listeners in on the interesting topic of dividends, which we haven’t really covered on this show yet we’ve talked about index funds and things like that to pay distributions. And I think in passing, we’ve probably mentioned dividend investing many times, we haven’t really sort of dove into it. So that’s what we’re going to talk about a little bit later on. So why don’t you just start off and introduce yourself. As Chrissy mentioned, you have your own blog, and you’re quite well known. You’ve been blogging for a while now. So in your own words, though, take it away. Let our listeners know who you are.

Bob
Sure. First of all, thanks for having me on. As Chrissy mentioned, I blog on Tawcan.com. Tawcan is a word I invented when I started using the internet is basically stands for Taiwanese Canadian. So the premise of the blog is to chronicle my journey toward financial independence and also choice for life. So I focus not just on the money aspect, but also on the on the life aspect because I think having money isn’t everything, right. So you need to be happy with your life. And you know, there’s other aspect of wellbeing than having money so I blog and write about dividend investing for one, financial independence but also mental wellness, not finding happiness and other topics that don’t really get to explore when it comes to personal finance. Yeah, then I started blogging, I forgot how like, I think was 26, 2015, 2016 somewhere there. So been blogging for five or six years now. So it’s been a while on the internet. We are in Vancouver, Canada, we’re a single income family. And obviously that makes it harder when it comes to financial independence. So part of the reason for the blog is to demonstrate it is possible to become financially independent, while on one single income while living in a one of the most expensive cities in the world.

Chrissy
And that’s how I discovered your blog before I started blogging. I was looking for another Vancouver blogger to connect with and I was so happy to found your blog and to read that your wife is also a stay at home mom like I am and you have two kids And that you live in Vancouver. So it’s really cool to have all these different stories out there. That it’s not just people who live in small towns, not just people who live in the US. There are a lot of us out there, including Canada and an expensive city. So thank you for sharing your story and your knowledge. And so you gave us a pretty good overview of yourself and your blog and your FIRE journey. So I think we’re ready to dive right into the main topic here because you’re quite prolific on your site, you write quite a bit, and I think your readers really go to you for advice on dividend investing. So you’ve written two posts that I’ve pulled some questions from, because they’re quite comprehensive. You have one called Dividend FAQ, which you list quite a number of questions, and recently also wrote Your Dividend and Index ETF Questions Answered, because apparently your FAQ wasn’t enough. So you had a few more questions to add.

Bob
Yeah, yeah. So I really didn’t have to queue up. Actually, both of those posts were written a while ago and I just recently updated them. But yeah, the first one published and then more questions came in and just to be set the record straight, we not only do dividend investing we also do index investing. So it’s a bit of a hybrid. The idea is to do dividend investing, so we get sort of predictable income. And then for index investing is more, getting that diversification both asset-wise and also geographical diversification. So kind of, I would call it best of both world, per se. So that’s our investing strategy.

Money Mechanic
Just a quick question, Chrissy has some great questions that we’re gonna follow up with. But just a quick question that because you mentioned that hybrid strategy, did you start with that from day one? Or did you start dividends and then go index or vice versa? The reason I asked is because I use a bit of this hybrid strategy as well. But I started just doing dividends the beginning and doing it poorly. And then kind of realizing like, Oh, you know what, I really need better diversification and the low fee index funds were the way to go. So how did you start?

Bob
Yeah, it’s funny that you asked that so I started dividend investing kind of by mistake. So when I started working, well I started DIY investing probably in 2006. So shortly after I graduated from university and I just sort of picked a stock back then was called IMG. Now it’s called internet financial for some reason I thought that was a bank account is that that used to be Tangerine used to be called ING. So I didn’t really do any research, I just thought, Oh, this sounds like a good name. But it turns out it pays dividend and I bought Manulife shortly after that, and both stocks got hit pretty hard during the financial crisis but I held on to them. And then over time, we started adding more and more dividend stocks. I started looking into index funds as I learn more about index especially after reading quite a number of books on index investing and the benefits of diversification, right so with everything investing, when you own like one or two stocks or even 10 stocks, your assets are very focused on on those individual stocks, right? So say you have five banks and then two utilities and three telecom. That’s all you have. Right? So So if if the banks are not doing well your portfolio doesn’t perform as well. So the idea is to add index and that’s what we did in last probably three years or so started adding index funds. We started off with the Canadian ones, but I feel mostly Canadians are heavy on on financials and and oil and gas. So I started looking into how can I diversify outside of Canada. So one of the ideas to buy us dividend stocks in our RRSPs to avoid withholding tax. Now, the other idea is to buy these ADR companies listed in US stocks exchanges, Vodafone, for example, or Unilever, but there’s not that many of them out there UK investors Canadian so then I started looking to international ETFs and that’s where I started doing VXE, the Vanguard ex-Canada index, and then we recently switched over to the iShares version of it, the XAW. That’s it. Right? And the idea is to be able to diversify outside of Canada and tap into the internationals like us, but not only us, but also, you know, developing countries, Asian countries and such. So we’re more diversified. And I think I think that’s, that’s a mistake when it comes to dividend investing people thinks that, you know, the banks, they can never fail by the look at the big five, but you know, you never know, right? So the more you’re diversified better, that makes life a bit easier. And you probably don’t see as much volatility when you’re more diversified. So that’s the idea. So yeah, we started off with dividend investing and then went to index and now we’re doing a bit of a hybrid.

Chrissy
Can I ask you, do you look at your portfolio is two halves, like you manage your dividends in a certain way, and your index investing. What I’m asking is about the international allocation. Do you look at the whole thing as a whole? And you have, you know, for instance, a third Canadian, a third US, a third international? Or is it that you look at each half on its own?

Bob
We look at it collectively. And to be honest, I would like to increase our international exposure more, if I’ve looked at our top 10. I think that’s currently a number five or six, depending on the on the value of different stocks. So ideally, I would like to have the exact value more in the top three, even top two to give up in more international exposure.

Chrissy
So where are you right now? What is your allocation to each?

Bob
Right now we’re international probably around, if I count all the US stocks as well, we’re probably around 30 to 40% international.

Chrissy
Okay.

Bob
I feel I won’t do like 50/50 or even 40/60. So reduce the Canadian exposure. Just so, I mean, Canadian, like I said, it’s very financial and oil and gas. So we all know that when oil price tanked, the Canadian economy didn’t do as well. So just trying to stay away from that as much as possible.

Money Mechanic
Yeah, I think that’s one of the big issues. I mean, I got myself into that problem too, because I started picking dividends at the beginning. And it was exciting because I had a TFSA where I knew those dividends were going to be coming in tax free, but I all of a sudden became way too biased to Canada. And I think a lot of us has found that it’s like, oh, now we need to get some other exposure to combat that.

Bob
But also I mean, if you look at Canadian stocks, for example, TD they’re diversify in the US, right? So like Bank of Nova Scotia, it’s they’re diversified in Latin America, but because of that they’re performing poorly recently, and then you look at something like AQN, which is a utility company, their plants are in the US too, right. So some companies do diversify and there are some REITs, international REITs that have their properties in Europe or US, but you’re listing in Canada so that in essence, it’s international too, you kind of have to see, just because it’s listed in Canadian Stock Exchange doesn’t mean it’s all Canada.

Money Mechanic
That’s a good point. That’s a really good point.

Chrissy
Can you tell us or tell our listeners if, let’s say most of our listeners are probably index investors, and they are interested in dabbling in dividend stocks, like, like you, maybe taking a hybrid approach? How would you suggest they get started? Because to me, it sounds like a lot of work. It’s a lot of research, you have to really know the companies like you do a ton of research and you have a lot of knowledge, but how does someone get there from zero?

Bob
Well, my approach is actually very simple to be honest. So I look at things that we use on a daily basis. What do you use on a daily basis that you rely on? So we use our cell phones so now tell us Rogers or Bell right? We use banking so your TD Royal Bank, Bank of Nova Scotia, CIBC, Bank of Montreal, most most People don’t switch their backs very, very rarely Telecom, you know, people are addicted to data. Right for this, we’re we all live in BC. Fortis BC now they have stocks they we have to use Fortis in the winter especially right. So things that we rely on that we can’t really get rid of. Another one’s your internet providers or no Shaw, for example, right. So I look at those and then start researching these companies. And then the other thing I do is I look at the index funds. So for example, VCN. And I look at the top 10, 20 companies that VCN holds and I see which one is paid. So those are the ones I would focus on. If I compare our portfolio with with VCN. For example, we probably hold 80 to 90% of the top 20 stocks that VCN holds right but instead with the index fund, you can really pick how much percentage each stock you hold? With m,e with our portfolio, I could allocate whatever percentage I feel like right. So that’s kind of why I like my own way. Essentially, I’m creating my own index fund by picking my own stocks. And once you have these these companies, you could go into more research, like how much dividend growth are they doing each year? What’s their PE ratio? What’s the payout ratio, usually I like to go in and read their quarterly annual reports, just to understand how the company is doing and if they change strategies at all. I mean, the big banks like the big names, you don’t probably need to do that much research because they’re pretty well known. But especially if I’m starting a new company that I’m interested to invest in, I do a bit more research and really dive into their annual and quarterly reports. But yeah, you could do a ton of research but because always keep it really, really simple. And just pick the pick companies that make things that you you use on a daily basis.

Money Mechanic
So one of the traps that I found when I started off with dividend investing is chasing yield. And discussing the large Canadian blue chips. As you mentioned, it’s fairly straightforward doing analysis on those. But I definitely got myself caught up and looking at some of the smaller market cap value stocks and we won’t go in… we could probably do a whole show on talking about how to use screeners properly, right. And a screener basically is putting in attributes that you want to specifically search for, but there’s all sorts of stocks out there that are kind of in the $10 to $20 range, that payout these, you know, 6, 7, 8 percent dividends. And I think a lot of people when they start dividend investing, chase that yield. Did you get caught up in that? And what do you do now to try and to rein yourself in from these juicy looking yields when their stocks are down and things like that?

Bob
Yeah, I’m guilty as charged. I fell into the yield trap and we all have to be honest, I fell into that again recently with Inter Pipeline.

Money Mechanic
Oh, yeah.

Bob
That was you about somewhere around 7% and then the the price started dropping because the oil price I knew that that stock was risky to begin with and I mean they have some debt and they have some future projects they’re working on. But I thought, you know, it’s a pipeline company people rely on on them for transporting resources. Yeah, that was that was when I got caught and we’re probably down about 30, 40% right now. So for me there’s there’s no point selling it. Because why take the take the loss, I’ll just wait and see what happens, right? Well, yeah, it’s when when you see stocks, are you looking like about 5%? Or warning signs should go off? Yeah, you definitely should do some more research, especially payout ratio. Now payout ratio doesn’t tell you everything because it’s its dividend divided by earnings. So some companies like Enbridge, for example, their payout ratio is probably over 100% because with pipelines companies, they regularly do maintenance and stuff as well. They’re earning gets suppressed. So why one parameter you need to do is their free cash flow. So how much cash are they generating per quarter and how much dividend are the P&L per quarter and then based on that you could you could determine whether the dividends are safe or not for reads, you can look at payout ratio from a traditional sense of earnings straight dividend divided by earning. With REITs you need to look at their annual report and look at the FFA that tells you how much fund they’re generating. And then look at how much dividends they’re they’re paying out now gives you a sense of the payout ratio. Now with REITs, they usually usually payout anywhere from 60 to 90% of their cash. So you’re a bit higher than than usual.

Chrissy
So you do invest in REITs?

Bob
Yeah.

Chrissy
Okay.

Bob
Yeah, we don’t invest in real estate other than our primary residence.

Money Mechanic
That’s not an investment.

Bob
No, okay that’s not an investment, but I don’t have any other rental property outside of our primary residence. And we invest in REITs because we don’t want to deal with the with finding tenants and

Money Mechanic
The clogged toilets. Everybody’s the clogged toilet. Does that ever happen? My house has never had clogged toilet?

Chrissy
Yeah, the 3am call.

Money Mechanic
But that’s like a typical, I don’t want to deal with the tenants and the clogged toilets. But what I was gonna say is, it was interesting, listen to what you were just talking about. Because I spent a lot of time at the beginning of my journey trying to learn about stock analysis. And you started throwing out some metrics there that a lot of our listeners probably went right over their heads. And I think it’s important to a as the listener realize that, like, Chrissy, like you said, there’s a lot more involved to it, and it’s a little bit more complicated to get into. And you’re going to need to learn, you know, like the price to earnings ratios, and like you mentioned, the dividend payout ratios. And, you know, basically, there’s probably a dozen main metrics that you need to understand quite well. And that’s how you’re going to do those. The analysis of those companies, and you mentioned all those, Bob, and I know you’ve got articles that talk about those. And there’s a lot of content out there. And that’s the one nice thing that this doesn’t have to be Canadian centric. So if you find content online about doing that, then you can just sort of understand the basics of that analysis. And you really need to before you get into dividend investing,

Bob
Yeah, and another thing I really like to do is compare companies in the same industry. So if you look at like, again, bank, take bank as an example. So if you look at TD versus Royal Bank versus Bank of Nova Scotia, you could quickly figure out which one is performing better than the other. You can look at their PE ratio, for example, no historical yield, right. So if if TD is yields historically at 4%, and today, it was at 5%. That means price has come down, right? If it all of a sudden only yields at 2%, that gives you a good indication that Oh, wait a minute, the price probably appreciated already. So again, that would give you a quick indication if the stock is overpriced or not. Now, it doesn’t give you a full picture, but as a starting point.

Chrissy
Now, how did you learn all this? You seem to have quite a wealth of knowledge. How, where did it come from? Like, are there resources you could point our listeners to?

Bob
Definitely a lot of readings, a lot of reading books. I also took some investing courses on my own. Basically, a lot of reading a good book is by Graham Buffett, Warren Buffett squared.

Money Mechanic
Random walk.

Bob
No. Random Walk Down Wall Street, that’s a good one, but Intelligent Investor. I think that’s called.

Chrissy
Okay, Benjamin Graham.

Bob
It’s a it’s a bit dry, but it’s a really good book, if you really want to get into the good stuff.

Money Mechanic
That’s a tough read. That’s a tough read. Okay, well, we could go way off the rails and get into that it’s probably it’s beyond my it’s on my level because I started reading that book, and I finally got to the point, I was like, Yeah, maybe not.

Chrissy
Yeah, my son found it at this school Christmas fair and bought at home for me, and I was like, Okay, I’m gonna have to read this now.

Money Mechanic
I want a book report on it next week!

Chrissy
Yeah, it’s a thick book.

Bob
Yeah. But even even like Beating the Street by Peter Lynch. Peter Lynch has some pretty good books, right? Reading books and also reading other other blogs. I’ve helped me understand how to analyze stocks and talking to other dividend investors, too. That has helped too.

Chrissy
Okay, so you’re learning about general investing as well, not just dividends specifically?

Bob
Correct.

Chrissy
Okay.

Bob
Yeah. And then I actually, in fact, got into very deep into technical analysis, and that’s another world that you could get into, which gets pretty complicated if you want it to be.

Money Mechanic
Yeah, if you want to bury yourself in graphs and candlesticks, and head and shoulders patterns and all the rest of it and if somebody’s listening and they’re like, that sounds amazing. There’s tons out there.

Chrissy
Not me!

Money Mechanic
It’s not required for financial independence. But it is super, super interesting. And I think, you know, the whole dividend investing is it’s a, it’s a real teaser at the beginning because so many of us and I was the same way as I didn’t really know a whole lot about investing. But it was tantalizing looking at these individual stocks and feeling like I had ownership in a company and that was gonna pay me a dividend. Now speaking of those dividends that get paid out to you, we’ll talk a little bit about tax efficiency and your different accounts. And also the other question they have for us those dividends, you take them in cash or the other, I’ll just throw it out there is the DRIP for our listeners is the dividend reinvestment program. Do you have a specific strategy with that?

Bob
Yeah, so right now we were fully reinvesting our dividends and we’re trying to be as tax efficient as possible. So what we do is we maximize our TFSA both my wife and my TFSA each year, at the beginning of the year so January 2, and then we buy stuff January second, or third, or within a week, we also maximize RRSPs. So, my RRSP, since I’m the only person working in the family, but I test that out of Spousal RRSP. So we try to split our RRSP up. So hopefully by the time we’re living off our dividends, we have similar dividend income to reduce our taxes. And then once our TFSA and RRSP are maximize, then we start investing in our taxable accounts. Both my wife and I’s now TFSA we only hold Canadian dividend paying stocks, meaning both just regular dividend stocks or reads for income trusts. Right? So we only hold those in TFSA and RRSPs. We hold Canadian ones but we try to hold as much US paying dividend stocks as possible because if you invest in US dividend stocks, outside the RRSP you get hit by a 15% withholding tax. So If the company pays you $1 dividend, you don’t actually get the full dollar, you only get 85 cents, right? So to avoid getting dinged by the government, we only invest US dividend paying stocks in RRSPs. In taxable accounts, we only invest in Canadian dividend stocks that pay eligible dividends. Now, what does that mean, eligible dividends? Those dividends are treated more favorable when it comes to income taxes, how you get dividend credits, essentially, it means don’t invest REITs in taxable accounts because that becomes a tax nightmare, right? Because based on the reason why they’re considered eligible dividends, because corporations like TD, when they earn their money, they pay taxes on top of that profit, and then they distribute part of that profit to the shareholders. So because that does up, the dividends are already taxed. You don’t pay tax on it. You only pay a little bit of tax on top of that. Now you tax your tax on your your marginal tax rate. And you get you actually get some dividend credits back. Whereas REITs, they don’t pay taxes when they take in their their rental income, they take the income, and then they pay, you know, 60 to 90% of income to you. So that income is not taxed. Right. So when you hold it in your taxable account, that becomes a tax nightmare. I don’t want to deal with that. That’s the reason we don’t do that. Now, Financial Mechanic was asking, what do we do with our dividends right now, right now we’re fully reinvesting. So we enroll in different revisions, reinvest and plan as much as we can, whenever we’re eligible. That means if TD share is $50 a share and we get $60 of dividend we add an additional share each time, TD pays dividends. Now with discount brokers, you can only do synthetic DRIPs. That means you can only buy one for shares. You could buy fractional shares if you enroll with their transfer agents and that’s and that that’s that’s very complicated because you actually have to gather the share certificate you have to contact the company and so on so on. There is one company called Share Owner that you could do fractional shares with them I think Share Owner is owned by Wealth Simple somehow we have our kids dividend portfolio set up with Share Owner. So the idea is we just leave and they let DRIP forever until they’re old. Yeah, so right now, if we look at our dividend income, we are DRIP ratio, which means how much money are we DRIPing? As part of our monthly dividend income we DRIP our DRIP ratio is anywhere from around 60 to 70%. So I mean, $4,000 we receive each month reinvest $700 $600 $700 of that dividend into buying additional shares. Now that leftover money, so the $320 leftover within that those accumulate, and once they’re roughly $1,000 or so then we reinvest into buying other shares or so on. So that’s the idea. Hopefully I answered your question. that’s a that’s a long answer.

Money Mechanic
Well, I stacked you up with multiple questions. So…

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Chrissy
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I want to ask a little bit more about the DRIPs because I’ve heard that if you use DRIPs in non-registered accounts because you mentioned your kids have their own accounts and I assume they’re non-registered because they’re not old enough for registered. Doesn’t that create a taxation nightmare? Because with DRIPs you have so many multiple cases of adjusted cost base where you have to keep refiguring out how much their their shares cost. Does that become an accounting nightmare for you?

Bob
That’s why you have a spreadsheet! I’m a spreadsheet nerd so that that’s not an issue.

Chrissy
Okay. See, for me, that’s just like a headache.

Unknown Speaker
I mean, I mean, it’s just not that hard right. So you just you just have to keep track of how much they say. Say you bought hundred shares at $100. That’s your initial cost basis. And then each time you get an additional share via DRIP or you have a fractional share, you just add it into your Excel sheet. And that automatically calculates your adjusted cost basis, right? And that only becomes an issue if you decide to sell. Right. If you decide to hold on it, you don’t have to deal with it.

Chrissy
Eventually you will. When you sell, you will have to.

Bob
Well eventually if we pass it to our kids then… even better yet you donate it.

Chrissy
Yeah, yeah.

Money Mechanic
And you can check out the show notes for Tawcan’s spreadsheet course coming up soon.

Bob
So speaking about that, I actually have a dividend spreadsheet.

Money Mechanic
It’s a good spreadsheet. Yeah, I keep seeing comments come up on that, because I’ve used it for a while too. It’s awesome.

Bob
And I actually just recently fixed it, because basically, it’s a Google spreadsheet and we utilizing Google finance, but Google Finance doesn’t pull dividend info. So what I did is I found in a function within the spreadsheet, so I was able to pull stuff right off of website. But that became unreliable. Because what happens the websites like Yahoo Finance, and they start doing using JavaScript. So this function gets wonky. So I then found an add-on. So now everything works perfectly. So knock on wood.

Money Mechanic
Okay, quick question about we talked about DRIPs and at what point when you choose to start taking the cash and I see a lot of people I love when people do their dividend income updates and things like that. And I know people have some goals of this being their income, their passive income when they get to financial independence. So if you’ve got a TFSA and RRSP, and a non-reg account, and you’re saying, you know, just I’m spitballing here, your monthly update is that you’ve got $1,500 in dividends, that’s your passive income. That’s fantastic, but I’m sure it’s not 500 per account and when we get to financial independence, how are we going to remove the cash? Like, it’s easy to say, Oh, look at that. Now we’ve got $4,000 a month in passive income, and that hits our annual spend. So we’re financially independent, we’re FIRE, we’re all good to go. But some of that cash is going to be in accounts that you’re not going to pull from. So how is that gonna work for you in financial independence when you get there?

Bob
Very good question. I actually wrote, I think two or three posts on that we have made some number assumptions, like how much our expenses will look like when we’re financially dependent. So we think anywhere, roughly 50,000 worth 50,000 Canadian will work for us. That’s with some buffer. Now, just to be to have some margin of safety. We use $60,000 a year as annual expenses that we need. So we need $60,000 of dividend income to cover us. So because we’re splitting between my wife and myself, where I mean, we’re never going to get to 50/50 split, because just how the RRSP is set up and so on. So something about like 6, 40/60, 45/55 split would be great. So then the other thing that I went into, in these analysis I did is, well, how much money can we withdraw from each account each year. So we could be pay as little tax as possible.

Money Mechanic
Exactly.

Bob
So with RRSPs, if you do an early withdrawal, you actually have to pay withholding tax. Now there is a trick so it’d be withholding the amount of withholding tax actually changes depending on the amount you pull out, so that that becomes a strategy you have to utilize. So our ideas, we’re going to utilize TFSA as much as possible, because TFSA anything you withdraw is tax free. So another clarification, when you withdraw money from RRSP that money is counted as employment income right? So that that gets taxed on your marginal tax free. So what you want to do is if you’re not working actively or if you’re doing a part time job, what you want to do is you want to stay under the first bracket, I forgot the exact number but essentially the bracket or you don’t have to pay any taxes.

Money Mechanic
Exactly.

Bob
So our strategy is that we’re going to withdraw. So just looking at up on my post right now. So with RRSP if you’re living outside of Canada, outside the Quebec because Quebec has different rates. If you draw up to $5,000 you have to pay 10% withholding tax between $5,000 and $15,000 is 20%. More than $15,000 is 30% so our ideas, we will draw $4,450 from our RRSP each year. Now we will get hit by $445 withholding tax, that’s 10%. We will still receive $4,005 from RRSPs. That is counted as income tax. And then our plan is to to get from my wife who gets about $5,000. Dividend income from her taxable account for me about $7,000. And combined together that get us underneath the rate, the next bracket. Yeah, so then we will have to give that 10% withholding tax back.

Chrissy
So I just want to clarify the withholding tax for our listeners in case they’re not familiar, it’s not an additional tax, it’s that they want to make sure you pay some of your tax, so they’re going to take some right away, but it doesn’t mean that’s adding on to your marginal tax rate, it will factor into that. So don’t worry, it’s not an extra additional penalty or something like that. In the States, you can’t withdraw from your 401k without paying a penalty but RRSPs are not like that there is no penalty, but you do lose the space forever. So you do have to keep that in mind if you’re withdrawing early.

Bob
And then in my analysis I actually said okay, well if I were to work part time and make $20,000 in a 40/60 mix. And according to my calculation, again, this this was done a couple years ago, we will actually pay something like, yeah, we would combined, we pay $756 in taxes with a combined taxable income of $40,010. So for me that that’s nothing. So there are definitely some strategies in terms of how do you how do you withdraw, especially from RRSP. And the other danger RRSP is you have to change RRSP into RRIF by the time you’re turning, I think 71 right. 71?

Money Mechanic
71, yeah.

Bob
Once you turn that in for if the government starts mandating how much you have to withdraw each year, for me that that’s not ideal now, right? Because you could have too much money and you have to you end up with a big hit in taxes and it also means you can get into some of the government benefits right there is clogged up so my idea is to start withdrawing from from RRSP, early to eventually collapse that, and then the other strategy some people have is you withdraw from your RRSP and then put that money into your TFSA each year. Right? So each year, right now it’s $6,000. So you withdraw $6,000 from your RRSP. Okay, hit by tax, but you transfer that to TFSA. So wherever you make from here, so a becomes tax free. So there are a few different strategies. And, again, I’m not a tax specialist. I do try to read as much as I can. But if you want to look into more of this, you should consult with a tax specialist.

Chrissy
Now where does, do your non-registered accounts come in? When do you plan to withdraw from those?

Bob
We do plan to withdraw as soon as we are living off our dividend income, but we’re trying to limit how much we’re withdrawing. So just looking at it. Again, I wrote this a while ago. So you know, we’re trying to withdraw from TFSA as much as we can, and then some RRSP and I use a little bit of taxable.

Money Mechanic
How do you respond to the question or the point of view from people that focus on total return as opposed to a dividend portfolio? Because I think we’ve been discussing the how you need to have a good strategy for taxable minimize your taxes during drawdown. And one of the arguments is that if you just have a total return portfolio, then you have much more control over those taxes because you create your own dividends, you don’t have to worry about them being spit out in your non-registered and things like that. Have you thought about that? And you’re still comfortable with the dividend side of it, obviously, but did you compare that did you weigh the options about making your dividends?

Bob
I did. And I think if you’re just talking about strictly investing in taxable accounts, then I think the capital appreciation, like the capital gain would be more efficient than dividend income. But if you take the tax advantage accounts into consideration that, the math becomes a bit fuzzy, right?

Money Mechanic
Right.

Bob
So with our strategy by withdrawing dividends from RRSP and TFSA, and we were also planning to eventually touch the principal, maybe not the first 5, 10 years, maybe later on, but gives us more flexibility. So I and just because I track our monthly dividend income doesn’t mean I don’t care about price appreciation. I do care about some sometimes investors say they don’t care, but I’m not there. I do care about dividend income and also price appreciation. So for example, we have some stocks are you know, already up 100, 220%, right. And also, even though I said at the initial I invest in dividend in an index fund, I do have a small, small, small percentage of my portfolio that we it’s kind of play money we were doing some, like growth stocks. So for example, we own Google and Facebook. Both of them have done really well. So yeah, so things like that. I mean, it’s not it doesn’t take out a huge percentage mine, our portfolio but it’s just kind of play money, right? So that’s my way of learning how to evaluate stocks. But yeah, to answer your question, I do think you have to look at look at everything holistically. So both dividend income and also capital gain. But the math gets fuzzy when you take tax advantaged accounts into consideration and also your withdrawal strategies could be different depending on the individual. So it’s a little bit hard to figure out which one is is more efficient.

Money Mechanic
And I think too is when you end up really getting into it, you see that the majority of the Canadian companies that are blue chip that you’re going to want to be holding do pay out dividends anyway. So whether it’s the Big Five banks, whether it’s the telcos or the utilities, you’re going to be getting a dividend. So it’s kind of a moot point A lot of people are like total return is about is everything. That’s what you want to go for. But if you want to hold some individual stocks, chances are in Canada, you’re going to get a dividend.

Bob
Yeah. And the other thing I often consider is, you know, people talk about percentage fees that you pay in index funds and for going crazy about, you know, fractions of a percent. And you again, look at it holistically, say you’re getting $60,000 a year from your portfolio, whether from capital gain or whatever the stocks doesn’t really matter, the $60,000 or $60,010. Like, it’s not gonna matter at the end of the day, right? Like, are you spending so much time fighting that little $1 $2? It’s like, no, yeah, you got better, better things to do. That’s my opinion anyways.

Chrissy
Is there anyone that you would say dividend investing is not for?

Bob
Good question. I have actually thought about that.

Chrissy
I feel like it’s not for someone like me, because I don’t want to do all the analysis.

Bob
If you want to just purely do passive investing. Maybe that’s not for you. You just want to you know, contribute a certain amount of money regularly buying index funds and have your robo advisor rebalances for you, and you don’t want to touch it at all. That’s perfectly fine. I think as long as you’re investing your money and, you know, instead hiding your money under your mattress, that’s great. I mean, some people just don’t have that interest. Right. So I think that’s totally fine.

Money Mechanic
I think too, we should probably mention that this isn’t a do or don’t situation, it’s that you don’t have to do dividend investing to be successful. We all know that a simple approach, as you said over a long period of time, is what makes everybody successful. Right? Yeah, there’s definitely a tendency if you’re controlling your own dividend portfolio, that a I mean, I’ve I’ve lost on poor picks, and you are probably more likely to move in and out of positions which the research has shown is detrimental to your overall return over time too, so everyone goes dividend, it’s free money, this is awesome, but there are a lot of caveats to it as well.

Bob
Yeah, it’s kind of like good analogy’s, maybe like asking people what kind of dessert you like to eat right? Some people prefer ice cream. Some people like chocolate cake, doesn’t mean one is better than the other is just personal preference.

Money Mechanic
Ice cream is way better than chocolate cake.

Chrissy
They’re even better together.

Bob
Ice Cream Cake. Okay, I will agree with ice cream cake. We could have ice cream cake. It’s hot enough today that I think that’s how we’re gonna wrap the show up. Chrissy, how you feeling? We’ve covered a lot of territory here. And we’ve probably some of our listeners are going to be just rubbing their hands together and getting ready to dive into Bob’s posts all about learn more, and some people like oh, I hope they talk about index ETF.

Chrissy
That’s me, I’m the index camp.

Money Mechanic
Anything else you want to dig into?

Chrissy
No, I think you covered a lot. I mean, there’s one big question that people on your blog ask you and let’s just ask you here. What is the dollar value of your portfolio?

Bob
$10 million, like Dr. Evil. No, um.

Money Mechanic
You know what? You can do the math.

Bob
That’s a very good question. Cuz I mean, I have my names on the internet, right. So I want to keep some privacy for our own sake, right? So I don’t I don’t list the actual portfolio value. And I don’t know, some information I withold, right. So for example, we don’t share our net worth number, how many shares we hold, but you could work it backwards, right? Like, if we could. Npw, right now, I think this year we’ll probably end up with somewhere around $27,000, maybe $30,000 dividend income, you know, you can work backwards by using 2% 3% 4% 5%. That gives you a kind of wide range of how much we have invested. Right. And like I said, Before, we don’t just invest in dividend index. We also have other other stuff, too, right. So I don’t know why people are so interested in, how much it’s like, does that matter if if I have, if I have $10 million invested versus I have $50,000 invested? Does that make me more success versus I don’t know. I’m not sure.

Money Mechanic
Well you know, I always follow along with Mark Seed’s weekend reading, and he got the very same question recently. I don’t know if you notice. It just came up. At the end of July, and he danced around the subject, like you did. So we’ll leave it at that. And I kind of my opinion on the whole net worth and portfolio balance, things like that. I think it’s super interesting for people that are new to the game, and they’re just getting started. And that sort of under $100,000 threshold where it’s you starting to see some growth, you’re excited, you’re putting money into it, but once it gets above into six figures, it’s kind of irrelevant at that point. And it’s not a competition and somebody we’re going to get there at different times. So the initial period where everyone’s sort of getting excited about it, that’s great to share and be and keep motivated and things like that, but at a certain point, you’ve been quote unquote successful on the journey to get there. So now it’s about sharing the information and, and helping the community.

Bob
Exactly and really when it comes to dividend investing, I do track our dividend growth percentage like year over year performance. And once you’re once you get a sizable dividend income, you will face what I call the law of a very big number. So you’re going to find it harder and harder to grow your dividend income. Right? So for example, if you get $100 dividend per year to get another hundred dollars is not that difficult because hundred dollars at 4% yield means you have to invest $2,500 to get another hundred dollars. Now, if you get, you know $30,000 of dividend to increase by 100%, meaning another $30,000 a 4% dividend yield, that’s $750,000 unless you’re some sort of CEO or some somebody making crazy amount of money, that’s pretty hard to do, right? So as you grow your dividend income, your dividend income growth is going to slow down and eventually you’re going to rely on 1) DRIPing and two the organic dividend growth from stocks. So for example, if TD is increasing their dividend by 5% each year, that’s how your dividend income will grow. And hopefully that percentage is growing. To be greater than your inflation rate.

Money Mechanic
I was just gonna say yeah, I was like we could go into whole new subject now talking about inflation, how dividends are kind of a hedge because companies increase their dividends and that’s part two, right? Yeah. Well, thanks so much for being on the show Bob. That was a lot of interesting information. And just remind our listeners well, Chrissy, I guess I should let you get a word in at the end here. If you’ve got something left to say otherwise, Bob, you can finish off with where our listeners can find you again, and any parting thoughts you might have?

Bob
Yeah, so you could you could find me on my blog, that’s at Tawcan.com, T-A-W-C-A-N dor com. I’m also pretty active on Twitter. So it’s @Tawcan. Just Google the word cuz I I’m the only one I use that word. Yeah, it’s it’s been a great been great talking about dividend income and dividend investing. I know there’s a lot of questions people may have, especially when you first start Also, if you’re new to this or you’re still Doing index investing, you want to see what dividend investing is like, feel free to email me or contact me check out my blog. And just the final word is that now if you’re doing index investing and you’re perfectly fine, you just want to be passive as passive as you can. Don’t feel pressure to change your strategy. Like the last thing you want to do is, is changing your strategy. I have this analogy I heard a while ago is called stay in line. Don’t Don’t jump around in like, imagine you’re at a grocery store. You’re in line, you’re like, Okay, that that line is quicker than the other line. But turns out it wasn’t. Right. So we change your strategy like that increases your return, right? So if you’re perfectly happy with index investing, stay in line stay with dividend investing now, sorry, index investing. Now if you have some interest in investing, great. Look at it, evaluate whether that that’s something you want to do, and do some sort of hybrid, right? Don’t just say okay, I’m doing dividend investing. index investing Now, that doesn’t work I just jump over to dividend investing, or even like, you know, options and stuff like that. Just throw.

Money Mechanic
That’s a fun one too.

Bob
That’s another world to dive into.

Money Mechanic
Yeah, for sure. That’s really good advice, holistic and investor psychology. Those are important things here.

Bob
Yeah. Another good phrase I learned was your ego is not your amigo. Amigo is friend in Spanish.

Money Mechanic
Your ego is not your amigo.

Bob
Your ego, your ego is not your friend.

Chrissy
Well, thank you so much, Bob. We had a great time with you. It took us a while to get you on but we’re happy we could finally get you on. Does that help you meet your goal? I think one of your goals this year was to get on more podcasts. So…

Bob
Yeah, for sure. And thanks for having me on. It says it’s always fun to talk and sort of clarify and making sure that what we’re doing is that makes sense, right? Because when I’m writing, it always makes sense in my head, so nice to talk to other people about it.

Chrissy
For sure. Thank you so much, and we hope we’ll talk to you again soon.

Bob
Yeah, thanks again.

Transcribed by Otter.ai

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