Building Wealth

For the first 30 or so years of working, saving and investing, you’ll be first in the mode of getting out of the hole (paying down debt), and then building your net worth (that’s wealth accumulation.). But don’t forget, wealth accumulation isn’t the ultimate goal. Decumulation is! (a separate category here at the Hub).

Why my goal to live off dividends remains alive and well

Posted By |
Image myownadvisor/honestmath.com

By Mark Seed, myownadvisor

Special to Financial Independence Hub

Some time ago…yours truly wrote a controversial post about the intent to live off dividends and distributions from our portfolio.

Well, a great deal of time has passed on that post by my thinking and goals remain the same – as least in part for semi-retirement!

Read on to learn why my approach to live off dividends remains alive and well this year in this updated post.

Why my goal to live off dividends remains alive and well

First, let’s back up to the controversy and offer a list why some investors couldn’t care less about my approach and why dividends may not matter at all to some people:

  1. The trouble with any “live off the dividends” approach is that you’d need to save too much to generate your desired income. Fair. 
  2. Dividends are not magical – there is nothing special about them. Sure.  
  3. A dollar of dividends is = a one-dollar increase in the stock price. True, a dollar is a dollar. 
  4. Stock picking (with dividend stocks) is fraught with under performance of the index long-term. I’m not convinced about that. 
  5. You can never possibly know long-term how dividends may or may not be paid by any company. Fair. 

In many respects these investors are not wrong.

You do need a bunch of capital to generate income.

Dividends are part of total return. [See image at the top of this blog.]

Stock selection can open up opportunities for market under performance.

And the negativity doesn’t stop there …

Some financial advisors will argue your investing world starts to shrink if you demand 2% or 3% (or more) income from your portfolio, so dividend investing leads to poor diversification.

My response to this: I don’t just invest in dividend paying stocks. 

Further still, some advisors will argue picking dividend paying stocks may lead to negative outcomes and too many biases.

My response to this: while I believe markets are generally efficient, I also believe that buying and holding some dividend paying stocks (while there could be market under-performance at times) does not necessarily mean I cannot achieve my goals. In fact, that’s the entire point of this investing thing anyhow – investing in a manner that keeps you motivated, inspired and helps you meet your long-term goals.

Consider this simple sketch art from Carl Richards, who is far more famous than I will be, and author of the One-Page Financial Plan and more:

Keep Investing Super Simple - Goals and Happiness

Source: Behavior Gap.

From Carl’s recent newsletter in my inbox:

“Pretend you live in some magic fantasy world where all of your dreams (according to the investment industry) come true, and you actually beat an index every quarter for your whole life. Congratulations!

So here’s my question: You landed in Shangri La, according to the financial industry. You beat the index. But you didn’t meet your goals. Are you happy?

The answer is “No.”

Now let’s flip that scenario on its head. The worst thing in the world happens to you (again, according to the investment industry). You slightly underperform the index every quarter for your whole life. But because of careful financial planning, you meet every one of your financial goals. Let me repeat the question: Are you happy?

And the answer is obviously… “Yes.”

Stop worrying about beating indexes. Focus instead on meeting your goals.”

Amen.

Finally, some advisors will argue that dividends and share buybacks and other forms of reinvesting capital back into the business can be equally shareholder friendly.

My response to this: Well of course that makes sense. Dividends are just one form of total returns.

But you know what?

The ability to live off dividends (and distributions from our ETFs) will be beneficial for these reasons:

1. I continue to believe there are simply too many unknowns about the financial future. So, living off dividends and distributions will help ensure our capital remains hard at work since it will remain intact.

2. If we are able to keep our capital intact we don’t need to worry as much about when to sell shares or ETF units when markets don’t cooperate. We can sell assets as we please over time.

3. Living off dividends is therefore just one way I’m trying to reduce sequence of returns risks. See below.

BlackRock - Sequence-of-returns-one-pager-va-us - December 2022 Page 2.pdf

Source: BlackRock.

As such, we’ll try to live off dividends and distributions in the early years of semi-retirement to avoid such risks.

4. I/we don’t necessarily believe in the 4% safe withdrawal rule. It’s impossible to predict next year, let alone 30 or more investing years.

5. I’m conservative as an investor. Seeing dividends roll into my account help me psychologically to stick to my investing plan.

6. Dividends is real money, tangible money I can spend if and when I choose without worrying about stock market prices or gyrations.

7. It is my hope dividends (and capital gains) can work together to help fight inflation. As consumer prices rise, as the cost of living rises, the companies that deliver our products and services will rise in price along with them.

8. I like dividend paying stocks for a bit of the “value-tilt” they offer. 

9. Canadian dividend paying stocks are tax-efficient. With my RRSP growing more with U.S. assets, I tend to keep Canadian dividend paying stocks in my TFSA and inside my non-registered account.

In a taxable account Canadian dividend paying stocks are eligible for a dividend tax credit from our government. This means taxation on dividends are favourable, it is a lower form of tax; lower than employment income and interest income. This will help me in the years to come.

Will I eventually spend the capital from my portfolio?

Of course I will.

But with a “live off dividends” mindset I can sell assets or incur capital gains largely on my own terms during retirement. I plan to do just that.

Why my goal to live off dividends remains alive and well summary

This site continues to share a journey that includes how passive dividend income can fulfill many of our retirement income needs – whether that might be covering our property taxes, paying our utility bills, delivering enough monthly income to cover our groceries, fund some international travel or all of these things combined.

Here was one of my recent updates below.

We’re now averaging over $3,300 per month from a few key accounts.

(Hint: likely more next month!)

We’re trending in a great direction thanks to this multi-year investing approach and I have no intentions of changing my/our overall approach.

I firmly believe our focus on the income that our portfolio generates, instead of the portfolio balance, is setting us up to deliver some decent semi-retirement income.

Our goal to live off dividends and distributions remains very much alive and well for the years ahead.

I look forward to your comments.

Mark Seed is a passionate DIY investor who lives in Ottawa.  He invests in Canadian and U.S. dividend paying stocks and low-cost Exchange Traded Funds on his quest to own a $1 million portfolio for an early retirement. You can follow Mark’s insights and perspectives on investing, and much more, by visiting My Own Advisor. This blog originally appeared on his site on March 27, 2023 and is republished on the Hub with his permission.

Defined Benefit pension plans continue to perform, despite ongoing market volatility

Posted By |
Image Mercer/Getty Images

By F. Hubert Tremblay, Partner, Mercer Canada

Special to Financial Independence Hub

 The last few years have thrown a number of hurdles on the markets. A pandemic and the recovery phase have been accompanied by recent additional uncertainty from the collapse of Silicon Valley Bank and fears of a global banking crash. Canadians looking at their retirement savings realize how volatility can affect their accounts and might have to save more to meet their retirement objectives or delay retirement.

Despite this volatility, the financial positions of defined benefit (DB) pension plans continued to improve over the last quarter, as indicated by the Mercer Pension Health Pulse (MPHP).

The MPHP, which tracks the median solvency ratio of the DB pension plans in Mercer’s pension database, rose in Q1, finishing the quarter at 116 per cent, a jump of 3 per cent from the beginning of 2023. This is on top of a remarkable jump of 10 per cent during 2022.

While the global banking crisis continues to wreak havoc on markets, a strong January and February helped ensure that Canadian DB plans remained unaffected, and most continued to improve. In fact, many plans’ funded positions finished the quarter in better positions than they have been in 20 years. However, looking ahead, there are several factors that may create more volatility and uncertainty for DB plans:

 The global economy at play

The global economy entered 2023 juggling multiple risks. Around the world, central banks were focused on tackling inflation by increasing their policy interest rates and other qualitative tightening activities. On the heels of the failure or takeover of high-profile banks in both the U.S. and Europe, policymakers must now weigh the consequences of continuing these tightening measures with the need to stabilize the banking sector overall.

The war in Ukraine – with no signs of resolution in the near future – could also mean continued global tensions and a reduction in global trade, all of which will negatively impact the global economy.

In North America, there is increased political polarization in the U.S., with the debt ceiling needing to be raised but neither side compromising to reach an agreement. The consequences of the American government debt default would be disastrous for global financial markets.

 The Canada equation

North of the border in Canada, in addition to the inflation scenario, Ottawa’s decision to cease issuing real return bonds (RRBs) and proceed with Bill C-228 caused a stir among pension stakeholders. Continue Reading…

How to build a portfolio of Fine Wines: for Fun & Profit

Posted By |

It’s been two years since former Vanguard Canada CEO Atul Tiwari launched Cult Wines Americas. Late in April, Tiwari celebrated the milestone with a small media gathering at Fine Wine Reserve, a premium wine storage facility in Toronto.

Atul Tiwari

For a refresher, see this Hub blog written by Tiwari late in 2021: A New Asset Class for Affluent Investors. It explains that the Cult Wine Investment story began in London, England in 2007, and in 2021 expanded into North America with offices in Toronto and New York.  See also these articles written by two Globe & Mail writers who were at this month’s event along with myself: How profitable is investing in fine wine? and Former Vanguard Canada CEO to head wine investing venture in the U.S. 

The idea behind Cult Wine Investment is to let you invest in leading global wines (mostly French) for ultimate profit, and to safely store it off-site while still having title to and access to the actual product, should you wish to consume a portion. As Tiwari told the G&M’s John Daly last year, “Cult Wines is not securities regulated, because you actually own the wine.” Below are some pointers on building a collection. Cult currently allows Canadian investors with as little as $12,500 (or US$10,000 for U.S. investors) to access a customized wine portfolio, with management fees ranging from 2.25%t to 2.95%, depending on portfolio size.

Marc Russell: www.finewinereserve.com

In addition to sampling the mostly-French wines, we had a quick tour of the Toronto storage facility, courtesy of Marc Russell, Founder and CEO of The Fine Wine Reserve Inc. (shown on the right).

The chart above shows a portfolio of Cult Fine Wines [CWI is the orange bars] has performed against its benchmark, the EP40 index (Green bars) as of March 31, 2023. EP40  is a fixed basket of 40 Bordeaux En Primeur wines.

“Fine wine as an asset class has performed as it should over the last two years,” Tiwari told me, “In a volatile market setting, Cult Wines has returned on average 16% in 2021 and 12.77% in 2022, in addition to providing the portfolio diversification  benefits of low correlations to equities, low volatility and acting as an inflation hedge.”

As we learned at the briefing, investing in fine wines for profit primarily means investing in French wines, mostly from the French districts of Bordeaux, Burgundy and Champagne. Those three districts account for roughly 80% of Cult Wine portfolios. At the briefing, the tasting focus was on the first two: after all,  Tiwari is a member of the Confrérie des Chevaliers du Tastevin, a global society of Burgundy aficionados.

A handout says Bordeaux wines are “the bedrock of fine wine” portfolios, adding that after a period of recent underperformance, “Bordeaux wines now offer more attractive relative values when compared to other French regions.” In addition, “the end of zero-COVID policies in China fuelled a surge in fine wine trading in early 2023.”

How to store fine wines

While most folk merely buy wines from the LCBO or nearby Vineyard and consume it within days, it turns out that storing multiple cases of wines for profit is considerably more complex. This was evident at the four of the Fine Wine Reserve, where temperature control, humidity and other variables are all far more complex than you might imagine. And yes, if you do hire them to store your wines, you are able to visit and even withdraw a few bottles or cases for actual use, should you desire to enjoy your investment as well as profit from it down the road.

Here are a few interesting talking points provided at the tour:

• Everyone overestimates the importance of cool temperatures when storing and aging fine wines, and underestimates the importance of temperature stability and high humidity.

• This explains why wines age best in the cool damp natural cellars located far below ground, as in Europe.

(Here I dare to add a personal note, since I once visited a white wine vineyard in France’s Loire Valley that bears the illustrious name Chevreau.)

• Wines are like kids. If you neglect them when young, they grow up unbalanced. Don’t put off proper storage. Stored improperly, wines will be irreversibly damaged within a year. And 1 hour in a hot car! Continue Reading…

3 things that make me want to pull my hair out

Posted By |
Pexels: Mikhail Nilov

By Bob Lai, Tawcan

Special to Financial Independence Hub

I have been writing on this blog for almost nine years. Over that time, I have learned and gained a lot of personal finance and investing-related knowledge. Whenever I gain new knowledge, I try to share it on this blog with the hope that readers can gain the same understanding as well.

As much as I love sharing new knowledge with other people, there seem to be some deep-rooted misunderstandings, myths, or misconceptions on certain topics. I really don’t understand why some people have these misconceptions and I will try my best to debunk some of the common misconceptions I have encountered, just so I don’t have to keep ripping my hair out.

#1 Don’t want a raise to avoid the next tax bracket

Our tax system is extremely complicated, so I understand there are some misunderstandings here and there. The biggest misunderstanding is that all your income is taxed at your tax marginal rate.

Due to this misunderstanding, people often make such statements like…

“I don’t want a raise just to get taxed more.”

“I am not working overtime to get bumped to the next bracket and lose my income to taxes.”

And so on…

But that’s a very very wrong understanding. Your income is taxed on a tiered bracket system. Below are the 2022 federal tax brackets.

Taxable Income – 2022 Brackets Tax Rate
$0 to $43,070 5.06%
$43,070.01 to $86,141 7.70%
$86,141.01 to $98,901 10.50%
$98,901.01 to $120,094 12.29%
$120,094.01 to $162,832 14.70%
$162,832.01 to $227,091 16.80%
Over $227,091 20.50%

So if you happen to make $90,000 a year, the entire amount does not get taxed at 12.29% tax rate. The first $43,070 is taxed at 5.06%, then the next $43,070.99 is taxed at 7.7%, then the rest is taxed at 10.50%.

Essentially your $90,000 annual income is taxed like below:

Income Tax Rate Tax amount
$43,070.00 5.06% $2,179.34
$43,070.99 7.70% $3,316.47
$3,859.01 10.50% $405.20

You’d be paying a total of $5,901.00 of federal tax on your $90,000 income, or an effective average tax rate of $6.56%. The same tiered tax bracket system is applicable to provincial taxes as well, albeit with different specific percentages for each province.

So no, the $90,000 you received isn’t all taxed at 10.50%. The amount is divided up and taxed at different tax rates.

What if you had an income of $90,000 and your employer decided to give you a $35,000 raise? Should you say no because you’ll move up two tax brackets federally from 10.5% to 14.7% and get taxed way more than your $35k raise?

It’s mind-boggling that some people actually believe this is the case and therefore would say no to any raises!!! Let’s do some quick and easy math to sort this out.

I ran the numbers using Wealthsimple’s 2022 income tax calculator and set BC as the province. Here’s the summary:

Income Federal Tax Provincial Tax (BC) CPP/EI Net
$90,000 $12,643 $5,079 $4,453 $67,825
$125,000 $21,146 $9,320 $4,453 $90,091
Delta $35,000 $8,503 $4,241 $0 $22,266

So, an increase of $35k a year raised your total taxes by $12,744 a year. More importantly, you will be netting $22,266 more than you’d have at the lower income of $90,000 a year.

So ask yourself, would you rather pay almost $13k more in taxes while pocketing over $22k more each year? Or would you rather not get the extra money at all? I think 99.9% of the population – if not more – would want the former.

All things equal, you will always come out ahead with a raise regardless of what tax bracket you end up with.

Fortunately, people that have this misconception are a very small percentage of the population.

#2 “Invest” in RRSP

Every February I hear statements in the line of… “I’m investing in my RRSP.” But when I ask for more clarification, I learn that people are simply transferring money into their RRSPs and letting that money sit in cash. They’re moving money into RRSP simply for the RRSP income tax deduction.

I get the idea of getting the RRSP tax deduction to reduce your overall taxes. But don’t you want your money to compound and grow? Why do you have your money sit inside a tax-deferred account and earn a measly 1% interest rate when you can invest in things like ETFs and stocks?

Some people argue that GICs are way safer than other investment vehicles like mutual funds, ETFs, and stocks because GICs have a guaranteed earning rate and you can’t lose money. Continue Reading…

How to stay motivated while Pursuing Financial Independence

Posted By |
Image courtesy of Terkel

From setting specific financial goals for success to having someone hold you accountable, here are 18 answers to the question, “What are your best tips for how to stay motivated and disciplined in the pursuit of financial independence?”  

  • Stay Disciplined and Goal-Oriented
  • Tie Your Goals to a Tangible Item
  • Stay Educated
  • Equate Money to Your Time
  • Celebrate Small Wins Along the Way
  • Develop an Action Plan
  • Create a Budget
  • Invest in Yourself
  • Develop a Strong “Why”
  • Have Fun With It
  • Set Specific Financial Goals for Success
  • Balance Spending Now and Saving for the Future
  • Start Tracking Your Progress
  • Focus On the Big Picture
  • Be Present
  • Build a Support System
  • Set Yourself Micro-Goals Along the Way
  • Find a Financial Accountability Buddy

Stay Disciplined and Goal-Oriented

Staying motivated and disciplined while pursuing financial independence requires commitment. One approach to remaining committed is to practice goal-setting, breaking down big goals into smaller goals that are based on achievable objectives. For example, if you want to save $1,000 in 3 months, break your bigger goal of saving money into a series of monthly phases, setting benchmarks each month as you inch closer to achieving your end goal. This helps with momentum and development while moving towards your desired result. — Michael Alexis, CEO, swag.org

Tie Your Goals to a Tangible Item

One often overlooked way to accomplish this is to tie your goals to a tangible item, such as a savings jar or bank account. Visualize yourself with it when planning out what you need to do today and watch as your small contributions add up. 

Having this visual representation can be just the thing you need on days when you feel unmotivated and looking for an excuse not to save money. Taking ownership of your financial goals is the first step towards realizing those dreams – that’s what staying disciplined will help you achieve! — Tasia Duske, CEO, Museum Hack

Stay Educated

Continually educating yourself about personal finance is crucial in staying motivated and disciplined as you pursue financial independence. Of course, this starts with knowing how to budget and set boundaries for yourself. 

As you strive toward financial independence, it’s important that you know where your money is going and identify areas where you can cut back on spending. There are a variety of ways that you can budget your money, so explore those options and find a way that works for you. 

If you are one who likes to invest, stay up to date on current market trends so you don’t take any enormous risks that could cost you a lot of money. As you continue to stay informed and educated about personal finance, you will make informed decisions and avoid costly mistakes, which will ultimately help you achieve your goals. — Bill Lyons, CEO, Griffin Funding

Equate Money to your Time

Whether you make minimum wage or $100 an hour, we all trade time for money. Spending less money is one way to achieve greater financial independence. But when you’re struggling to cut expenses, one way to stay motivated is to understand how much time your money costs you. 

For example, if you’re toying with the idea of a $50 purchase, think of how much of your time it would take to make back that $50. How far would that put you behind? Would you be willing to spend that time getting that item?

Thinking about money in terms of minutes/hours of your life can help you exercise some restraint on impulse buys or unnecessary purchases. If you feel like it would be a waste of time, it’s probably a waste of money, too. — Alli Hill, Founder and Director, Fleurish Freelance

Celebrate Small Wins along the way

Achieving financial independence can be a long and difficult journey, and it’s easy to become discouraged if you only look at the result. You can keep your motivation and momentum going by celebrating minor victories along the way.

Set attainable short-term goals, such as paying off a credit card or increasing your monthly savings by a certain amount. When you achieve these objectives, take the time to recognize your accomplishments and reward yourself‌. 

As a reward for sticking with it, give yourself a small treat or indulge in a favorite activity. This will help you in maintaining your motivation and discipline, as well as making the journey to financial independence more enjoyable. –– Johannes Larsson, Founder and CEO, JohannesLarsson.com

Develop an Action Plan

It is important to develop a plan with realistic goals. Start by setting short-term goals that are achievable, such as saving a certain percentage of each paycheck or paying off the debt within a certain timeframe. 

Then, set longer-term goals for retirement savings or other goals related to financial independence. Having a plan will help keep you motivated and on track to achieving your financial goals. — Martin Seeley, CEO, Mattress Next Day Continue Reading…