All posts by Jonathan Chevreau

The 2017 MoneySense ETF All-Stars

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The fifth edition of the MoneySense ETF All-stars is available online here. This annual feature used to appear in the print edition of the magazine and was originally written by Dan Bortolotti, who is now a full time investment advisor with PWL Capital Inc., and well known for his Canadian Couch Potato blog.

In recent years, I’ve written it, with the assistance of an expert panel of ETF experts you can find in the link. They include Dan himself and his partner Justin Bender at PWL, Tyler Mordy at Forstrong Global Asset Management, Mark Yamada at PUR Data, Yves Rebetez, editor of ETF Insight), and Alan Fusty of Index Wealth Management. (The same members as last year).

As you’ll see, because the goal of the panel is to identify low-cost, well diversified ETFs that can be bought and held over the long run, we try not to make changes just for the sake of change. As a result, 12 of the 14 picks from 2016 are back in 2017, with two substitutions deemed necessary in the US equity and fixed income categories.

Changes in US equity and fixed-income categories

In the case of the US equity category, the panel stood pat with two Vanguard S&P 500 ETFs (hedged and unhedged) but replaced a third Vanguard ETF in this category, VUN, with a new offering, XUU, launched in 2015: the iShares Core S&P US Total Market Index ETF.

The other big change was in fixed-income. Four of our five fixed-income picks are back, with one major tweak: the removal of VAB, Vanguard Canadian Aggregate Bond Index ETF, and its replacement by ZAG, the BMO Aggregate Bond Index ETF.

For the most part, the panel was unanimous in making these two particular tweaks although of course there was a fair amount of debate throughout the process, which you can read about in the full article online.

 

Q&A: How Dividends can speed Financial Independence

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I recently had a chance to discuss a new Canadian advisory on dividend stocks with the people responsible for that newsletter. The advisory comes from TSI Network, founded by Pat McKeough, whose investment approach I have always respected.

The advisory is TSI Dividend Advisor (shown above), and it grew out of a long respect for the power of dividends.

Pat and his investment team have always viewed dividends as a sign of investment quality. By extension, dividend stocks become the most reliable foundation of an investment portfolio built for growing wealth and financial independence.

This confidence in dividends is accompanied by a detailed examination of dividend-paying stocks to identify those with the greatest potential to sustain, and raise, their payouts.

The 8 key points they use to evaluate dividend stocks grew into their Dividend Sustainability Ratings. This proprietary ratings system became the backbone of the new TSI Dividend Advisor.  It was launched late in 2016 to impressive reviews in the media and a flood of subscriptions from Canadian investors.

Here are some of the keys to that success, from the editors’ point of view.

Jon Chevreau:  First of all, Pat, thanks for your time. What role do dividends play in a  successful portfolio? How can they lead to Findependence?

Pat McKeough

Pat McKeough: Top dividend stocks are a key part of a successful portfolio. Top dividend stocks can produce as much as a third of your total return over long periods. These payouts are drawn from earnings cash flow and paid to the shareholders of the company. Typically, these dividends are paid quarterly, although they may be paid annually or monthly as well.

At TSI Network, we think investing in dividend stocks is one of the best investment decisions you can make to achieve Findependence. Dividends serve as a way for companies to share the wealth they accumulate through successfully operating their businesses.

JC: Many stocks have dividends. What makes a top dividend stock?

Jon Chevreau

PM: Top dividend stocks provide steady dividends: a sign of investment quality. Some good companies reinvest profits instead of paying dividends. But fraudulent and failing companies hardly ever pay dividends. So if you only buy stocks that pay dividends, you’ll automatically stay out of almost all the market’s worst stocks. For a true measure of stability, focus on companies that have maintained or raised their dividends during economic and stock market downturns. These firms leave themselves enough room to handle periods of earnings volatility. By continually rewarding investors, and retaining enough cash to finance their businesses, top dividend stocks provide an attractive mix of safety, income and growth. Continue Reading…

Retired Money: Still a place for Spousal RRSPs

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My latest MoneySense Retired Money blog has just been published, which you can find by clicking on this highlighted link: Tax Strategies using spousal RRSPs.

This is the second in a series: the first one focused on pension splitting and can be found here: Pension splitting is now ten years old. The Financial Post also ran a related piece called Spousal RRSPs are an often overlooked retirement savings tool.

As these pieces note, income splitting usually works best for families when two spouses are in different tax brackets. Particularly if one spouse is a big earner and the second isn’t making peony at all.

As CIBC Wealth’s Jamie Golombek observed in this piece in the FP — Tax Season is Upon Us — the Family Tax Cut is no more as of 2016: that was a version of income splitting that let families with children under 18 transfer up to $50,000 of income to his or her lower-income spouse or partner. But “seniors need not worry,” Golombek added: seniors can still split eligible pension income with spouses or common-law partners.

And spousal RRSPs still present non-seniors with another valid income-splitting alternative, again assuming that a couple occupy disparate tax brackets.  As the MoneySense piece phrases it, all those years the high-earning spouse is saving for retirement, the ideal solution would be to get a tax deduction for RRSP contributions but when it comes time to receive the income, to receive it in the hands of the lower-income spouse.

And that’s exactly what a spousal RRSP does. The contributor can deduct the amount of the spousal RRSP deposit from his/her (higher) earned income, while the recipient (the husband in our example) owns the investments. The aim is to equalize retirement income of both spouses, and to have the RRSP funds withdrawn by the recipient spouse at his or her lower tax rate.

Unlike pension splitting, you’re not restricted to splitting just 50% of the income: you can have 100% of it taxed in the lower-earning spouse if so desired. This income splitting also helps the couple each qualify for the $2,000 pension credit.

There are plenty of nuances to this, such as splitting CPP or QPP income after age 60. But as Chris Cottier, an investment advisor with Richardson GMP Limited, says, the spousal RRSP is generally a “no-lose” proposition.

A Procrastinator’s Guide to RRSPs

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Procrastinators: There is just a week to go until the March 1st deadline for making contributions to a Registered Retirement Savings Plan (RRSP). My column in the Financial Post in today’s paper (page FP10) can also be found online by clicking on the following highlighted text of the headline, As the RRSP deadline looms, here’s what all the procrastinators need to know.

One of the sources cited is CPA David Trahair, author of the book illustrated to the left: The Procrastinator’s Guide to Retirement. Here’s a link to the Hub’s review of that book.

The FP piece notes that while making an RRSP contribution before the deadline is not technically a “use it or lose it” proposition, procrastination nevertheless provides opportunity losses: you end up paying more income tax than necessary for the 2016 tax year (reminder, THAT deadline is also looming: see Jamie Golombek’s reminder in his FP column: Tax season is upon us.) Procrastination also creates the opportunity loss of considerable tax-compounded investment growth.

While you can arrange an RRSP top-up loan or — for multiple years of under contributions — an RRSP “catch-up” loan, my conclusion is that the optimum course of action is to automate RRSP savings through a pre-authorized checking (PAC) arrangement with a financial institution. This approach also allows you to “dollar cost average” your way into financial markets: that way, you reduce the stress of coming up with a large lump sum to contribute, as well as the stress of fretting about the best time to invest.

Of course, as Trahair notes at the end of the article, and as Borrowell’s Eva Wong reminded us in her Hub blog on Monday, if you’re heavily in debt you may be better off eliminating that debt before getting too serious about RRSP contributions: See When you should NOT invest in an RRSP.

Raising Retirement Age: Can the Liberals find a way in upcoming Budget to tempt us to wait until 67 for OAS & CPP?

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PM Trudeau reversed the Conservatives’ plan to raise OAS from 65 to 67, making it harder to follow advice to raise the Retirement Age going forward.

My latest Motley Fool blog looks at whether the Liberal Government intends to implement any suggestions by its Economic Advisory Council about raising the Retirement Age. See Will the Looming Federal Budget Try to Slip by Another Senior’s Benefit?

Of course, as one source says, the Government officially doesn’t want to raise the age of OAS and CPP eligibility from the current 65 to 67. After all, if it wanted to do that, all it had to do was leave in place the Harper administration’s policy that would have done just that for Old Age Security, albeit phased in gradually by the year 2023.

Even so, they must be sorely tempted, considering the fact that so many other Governments around the world are raising the retirement age to accommodate rising life expectancy patterns. The number of OAS recipients is expected to double over the next two decades, as more and more Baby Boomers take the plunge into Retirement, or at least Semi-Retirement.

Still, there’s more than one way to skin a cat. As I point out in the blog, anything as radical as raising the retirement age needs to be implemented gradually so as not to wreck the well-laid plans of financial advisors and clients who may have been counting on the rules as they now exist.

Delaying retirement age should be voluntary, not compelled by Government

Continue Reading…