Looking for Silver Linings in the Face of Economic Turmoil and Other Musings

Things are dire in the markets right now. The TSX/S&P index is down over 28% since the beginning of the year with our investments following suit. While we have a fairly diversified stock portfolio, that helps little in situations like this where all sectors are down across the board.  Our strategy of relying on dividends rather than the value of our stock will buffer us to a large degree. We are always at risk of dividend cuts but since we hold shares in so many different companies, no one company's dividend cut would substantially hurt our income situation.  Most of our companies are large cap, blue chip organizations that should be able to withstand what hopefully will be a temporary setback, but it is something that we will need to keep an eye on.  While a few of these companies may consider temporarily suspending any regularly scheduled dividend increases, most will be hesitant to cut dividends since this will be admitting weakness. The same premise held true for the Financial crash of 2008, although those were different circumstances.

Using TMX Money and Morningstar websites as information sources, I took inventory of our holdings to see where we stood in terms of upcoming dividend payments.  We are lucky that many of the companies whose stock we own have already declared their dividends earlier in 1Q2020 and are therefore obliged (legally?) to pay out at least through April.  A significant number of them even declared increases in dividend, right on schedule at the same time that they have for the past 3-5+ years.  It is interesting to note though that most of these declarations occurred before the MAJOR market free-fall that started around the beginning of March.  The only stock that still committed to a dividend increase after the beginning of March is Premium Brands (PBH) which declared mid March. I wonder if they regret it now?

By contrast, Canadian Apartment Properties (CAR.UN) also declared in mid March but did not raise its dividend as per schedule for the first time since 2012.  Bank of Nova Scotia (BNS) typically declares a dividend raise twice a year, payable in April and October.  There was no dividend raise for April 2020, even though the dividend was declared back in mid February, prior to the crash.  I wonder if the bank could foresee what was coming?

We hold stock in a few financially fragile companies who might not be able to withstand the downturn, especially those in industries directly hit by the reduction in business caused by self-quarantine and social distancing measures.  Already Cineplex (CGX) has missed its monthly scheduled dividend declaration date, which leads to the reasonable assumption that they will not be paying any dividends while their theatres remain closed.  Chemtrade Logistics (CHE.UN) has already declared that it will slash its April dividend in half.  Whether this is temporary or permanent is to be determined since Chemtrade has been struggling for a while now.  The companies that pay out monthly, like CGX and CHE.UN, have less time to ride out the storm than those that pay quarterly.  Corus Entertainment (CJR.B) and Husky Oil (HSE) already declared their 1st quarter dividend and do not need to decide on their next declaration until mid April and mid May respectively.  So these companies have a bit of time to wait and see if there will be a miraculous market recovery in the interim.  In the meantime, their share prices have plummeted to the point that their dividend yields are dangerously in the double digit range.

It will be telling to see what happens for our next set of companies who usually make their 2nd quarter dividend declarations around the end of April to mid May for payout between June to July.  While all of these companies have taken hits to their share prices, hopefully most of them will be able to ride it out and wait for a recovery.  It would not be surprising if they skip their annual dividend raises, but we just hope that they don't reduce their dividend payouts, temporarily or otherwise.

As with the last financial crisis in 2008, the secret is to stick to our "buy and hold" strategy and not succumb to the frenzy of panic selling that is currently sweeping the markets.  This would only lock in what is otherwise just transient losses on paper.  We can withstand minor cuts to our dividend income while we wait out the end of the pandemic.  In fact, there are various ways to benefit from the downturn, just as there were in 2008, although this time the situation is a bit more dire, extreme and unpredictable.

As of right now, all stocks across the board are "on sale".  It is a fine time for those waiting to get into the market, although it is difficult to know when prices have bottomed out. Since we are in retirement spending mode as opposed to retirement savings mode, we do not have much spare cash available to take advantage of the depressed market.  However we are able to DRIP (Dividend Reinvestment Plan) in our registered accounts (RRSP, RRIF, TFSA) in order to buy small amounts of stock at relatively lower prices each time we are paid a dividend from various companies. 

Since COVID-19 has forced the cancellation or closure of most of the social activities that constitute our "discretionary" spending, we actually have significantly less spending and more cash flow for the month of March. We have received refunds for pre-paid travel expenses, theatre tickets, movie events, tennis fees, gym memberships and more.  Social distancing and the mandated closure of all non-essential shops, services and entertainment options means that discretionary spending has been reduced to just about zero.  We can no longer dine at restaurants and the need to take transit or fill up gas to drive anywhere has trickled to a halt since there is nowhere to go.  We are left with only "mandatory" expenses to pay for.  Our monthly credit card bill for March is the lowest that it has been in years and this trend should continue until the crisis is over.  This should help any dividend hit that we incur.

Part of the contingency factored into our early retirement plan was the ability to scale back discretionary spending if we ever fell behind in our annual retirement projections.  To date, this has not been required since we went through so many great years in the stock market that we are now way ahead of plan.  But this enforced reduction in our spending opportunities has provided a good chance to reassess the cost of the bare-bones minimum monthly expenditures in our budget.  At this point, we are down to condo fees, property tax, hydro bills, utilities (cell phones, internet, cable), food, medicine, sundries (like toilet paper!?!) and NETFLIX (in order to survive the boredom!!).  I doubt that anyone stuck at home for such extended periods of time would debate that internet access and TV/Streaming services have become mandatory expenses.

One unexpected side-effect resulted from the massive loss in value in all of our accounts.  My husband Rich's locked-in Life Income Fund (LIF) is governed by strict rules that limit the maximum that you can withdraw each year, with the goal of making the funds last until age 90.  One of the few exceptions is the "Small Amount" Rule for Ontario which states:

If you are at least 55 years old and the total value of all money held in every Ontario locked-in account you own is less than $22,960 <amt recalculated each year>, you can apply to withdraw all the money in your Ontario locked-in account or transfer it to a RRSP or RRIF.

Prior to the big crash at the beginning of March, the value of Rich's LIF came nowhere near qualifying for the small amount rule.  Within a week, the value had plunged to the point that it qualified easily.  He filled out Form 5 from the Financial Services Commission of Ontario website and requested that all the stock and cash sitting in his LIF be transferred to his Spousal RRSP.  It took about 5 business days for our discount broker Scotia iTrade to execute the request and in that interim, we were concerned that the stock would rebound and no longer qualify.  No worries there, since the share price fell even further over these days.  So now he has successfully broken free from the strict rules of the LIF and he no longer needs to trigger annual withdrawals from that account.  Because the stock was transferred in-kind from registered account to registered account, there was no sale to lock in the losses and hopefully this will not count as LIF income.  The shares can now sit in his RRSP collecting dividends, allowing time for the share price to eventually bounce back.

We had already made our mandatory annual RRIF and LIF withdrawals at the beginning of the year before the stock crash.  I gave some thought as to what we could do if this was not the case. First I would defer the withdrawals until the end of the year to allow maximum chance for the markets to recover.  If that does not happen, then I would make my RRIF/LIF withdrawals as stock-in-kind into my non-registered account so that there is no actual sale of stock to lock in the loss values.  I would then keep the stock there and let the prices rebound.  As a side benefit, the dividends generated by the new stock in the non-registered account would be taxed at a much more favourable rate.  If I needed the value of those withdrawals to live on, instead of selling stock at a steep loss to generate cash, I would initially raid our long-term emergency kitties, hoping to replenish them once the market rebounded. Finally I would withdraw the minimum allowable amount for the year, which the Federal government has provided a one-time reduction of 25%.

These are trying times for all of us.  It is important to stay calm and not panic.

Beware of "Ghosting" Your Spouse Credit-wise

Being the more detail oriented, organized and proactive person in our marriage, I have been the one to apply for any credit cards, making my husband Rich a secondary card holder.  I am also the registered owner for utility bills such as phone, cable, internet and cell phones.  All of our bank accounts are joint and the only accounts actually in his name alone are his RRIF and TFSA.  There is an unfortunate side effect of this which did not become apparent until the day Rich tried to open his own EQ Bank savings account.

We found out that Rich now has an extended period with no "credit history" even though he has been spending regularly on his credit cards, for which I pay off the entire balance every month.  He does not even have an easily accepted secondary "proof of identity" since his name is not on any of our utility bills, which seems to be the defacto identification criteria requested by many institutions.  After providing his driver's license, we realized that he could not produce any of the requested additional bills or statements that had just his name on it.  Even our property tax statement lists both of our names with mine is listed first.  Eventually he was able to use his T4RIF statement to confirm his identity and was able to successfully open the bank account.

However,  this did not help with Rich's lack of credit history, which is defined as "A consumer's ability to repay debts and demonstrated responsibility in repaying debts."  Your credit score is calculated by totaling points assigned based on:

• Payment history - how promptly and completely you pay off your credit debts
• Debt level - the amount of available credit that is used up each month
• Credit history - the amount of time you have held each type of credit
• Types of credit - whether you have credit cards, line of credit, mortgage, car loans, etc.
• Requests for new credit - each new request decreases your credit score

Other than our credit cards, which are all in my name, we have no debt.  We paid off the mortgage on our home over 15 years ago and do not have any outstanding loans or even a line of credit.  This leaves Rich with a low credit score, since he has no types of credit to generate payment history, credit history or debt levels.  Despite not being over-extended with debt and my always paying off the little debt that we owe on our credit cards, Rich gets no credit (pun intended) for being a good loan risk.  It probably does not help either that we have been retired for over 7 years now, and therefore do not have recent employment history or income.

It has become a bit of a catch-22.  Rich has tried to rectify the situation by applying for one of the higher-end credit cards under his own name, but was rejected even though he can prove that he (as well as we as our household) have more than sufficient funds to support such a card.  Most recently we wanted to get a BMO World Elite Mastercard which has many perks including 4 free airport lounge passes per year and is currently under promo for 1 year no service charge.  As expected, Rich was declined by the automatic online assessment, but this time we made an appointment to speak to a BMO Personal Banking rep at our local branch.  We went armed with proof of income in the form of several years of income tax statements, along with an explanation as to his lack of credit history.

It took several days involving communications with more senior loan officers who wanted to see further proof of liquid assets, but Rich finally qualified for this credit card.  Now he needs to establish a better credit score by retaining the card for more than a few months, spending on average less than 35% of his available credit limit, and paying off the full amount owed every month.   Let this be a lesson learned for couples who allow one partner to generate all the credit history while the other partner has none.  All the bank representatives that we spoke to commented on how often they encountered this issue.  Once this happens, it becomes a big pain to try to resolve the situation.