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).
Are you trying to succeed with investments? Our Successful Investor approach teaches these 3 key rules we teach to subscribers.
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Successful investors try to arrange their portfolios so that they more-or-less automatically tap into the profit and long-term growth that inevitably comes with well-established companies.
And now is a particularly good time to follow our Successful Investor investment approach. Our system of the most successful investment strategies has three key rules:
Rule #1: Invest mainly in well-established, profitable, dividend-paying stocks.
Our first rule in the most successful investment strategies will help you stay out of high-risk, low-quality investments. These investments are always available, in good and bad markets. They come with hidden risks due to conflicts of interest and other negatives. Every year, they lead many inexperienced investors to substantial losses.
Recent standout losers include bitcoin and other cryptocurrencies; a disappointing crop of new issues (IPOs), which tend to come to market when it’s a good time for the new-issue company or its insiders to sell, but not a good time for you to buy; and slapped-together promotional stocks that hit the market thanks to the SPAC phenomenon, which offers a short cut to IPO status.
Rule #2: Spread your money out across most if not all of the five main economic sectors.
This is our key to successful diversification. The widely disparaged resource sector turned out to have some major winners last year, in Canadian oil and gas stocks. Nutrien Ltd., our top fertilizer recommendation, shot up in early 2022 as the Russian invaded Ukraine, which put a big dent in world grain supplies.
On the other hand, if you had disregarded resource stocks with the intention of doubling down on tech stocks, you might have wound up with excessive holdings in tech stocks just as they entered a plunge.
Rule # 3: Downplay or avoid stocks in the broker/media limelight.
We’ve recommended a handful of tech stocks and other broker/media favourites in the past few years, but we always advised against concentrating on them.
Rather than zero in on broker/media favourites, we prefer to apply our first and second rules. If you build a balanced, diversified portfolio of high-quality stocks, it’s hard to go too far wrong, even in a challenging year like 2022 that we’ve recently experienced.
Understanding successful investments
A successful investment is one that provides long-term gains for its investors. Profitability will mean different things to many investors. One key to making a successful investment is you need to disregard or at least downplay investment marketing messages. Continue Reading…
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:
The trouble with any “live off the dividends” approach is that you’d need to save too much to generate your desired income. Fair.
Dividends are not magical – there is nothing special about them. Sure.
A dollar of dividends is = a one-dollar increase in the stock price. True, a dollar is a dollar.
Stock picking (with dividend stocks) is fraught with under performance of the index long-term. I’m not convinced about that.
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:
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.
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.
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.
With no desire to leave a large estate, it wouldn’t make sense for us not to do so!
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.
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…
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.
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…
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.
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?
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