Coming out of the pandemic - Looking forward to bank dividend raises

For buy and hold dividend-paying stock investors like ourselves, Canadian banks have traditionally been safe bets in terms of continuing to provide a steadily increasing source of income. Dating back to the period after the Great Depression, the banks in general have shied away from cutting their dividends despite numerous recessions and economic downturns.  In fact over the past several decades, all 5 “big banks” plus National Bank have consistently raised their dividends annually, just like clockwork.

The COVID19 pandemic brought on a good news/bad news situation, depending on your perspective.  The good news is that despite enduring over 1.5 years of lockdowns, job losses and business closures that brought instability and uncertainty to the economy, none of the banks cut their dividends. The bad news is that during this same timeframe, the OFSI (Canada’s banking watchdog) has prevented the banks from increasing their dividends in order to ensure the financial health of the banking system. This has continued despite the banks all generating better than expected profits and accumulating huge levels of excess capital. 

Now with the lockdowns coming to an end across the country and the economy rebounding, investors are anxiously awaiting the easing of these restrictions on the banks, although the possibility of the Delta variant triggering a dreaded fourth wave and another lockdown may put a damper to these hopes.  Dividend declarations for the banks have already been made for the first 3 quarters of 2021 without any dividend raises.  The 4^th quarter dividend declarations for each of the banks should occur around the end of August, with Ex-Dates (the date before which you need buy a stock in order to qualify for the upcoming dividend payout) ranging between end of September to end of October, and the payout dates from October to November.  This will be the last chance for the banks to increase their dividends for 2021, and if they do come, the payouts are likely be larger than normal to make up for the missed increases of the past two years.

If and when banks are allowed to resume their raising of dividend payouts, it will be interesting to see how they do it.  There have been talks of increases in the range of 13-20%, when prior to COVID, the annual increases were around 3%.  To me, it seems more likely that a huge dividend boost would be paid out as a one-time special payout rather than a straight dividend raise.  As history has shown, once a bank raises its dividend, it does not decrease it again, come hell or high water or even pandemic.  If the banks raised their dividends by double-digits, future raises would compound upon this.  Giving out a special dividend to reduce the excess coffers, on top of the normal 3% raise, seems much more reasonable and sustainable.  Regardless of how it is done, there seems to be a large (but potentially one-time) increase in income coming our way, since we hold stock in all 5 big banks plus National Bank.

This leads to an interesting quandary for us with regards to our annual RRIF withdrawals, our taxable income for the year, and the resultant tax bracket that we will end up in.  In a normal year, we can come pretty close to predicting what our net income will be, since our income consists of the dividends paid out from our non-registered account (which we split equally), plus the annual mandated withdrawal that we make from our individual RRIF accounts.  We can roughly guess what the dividend payout from the non-registered will be by assuming a small increase fueled mostly by the dependable dividend-raising stalwarts that we own, including banks, telco, and railways.

We usually withdraw more than the government-mandated annual minimum from our RRIFs since our goal is to reduce the size of our RRIFs by the time we are 70 to minimize Old Age Security (OAS) claw-back.  Balanced against this goal is the need to keep our taxable income below the higher tax brackets in order to keep our income tax owed at a reasonable level.  By deciding which tax bracket we want to stay within, we can work backwards to determine how much we can withdraw from our RRIFs.  I use the previous year’s StudioTax online tax program to help make this determination.

In the past we would usually do this calculation at the beginning of a new year and make an early RRIF withdrawal.  Since our early retirement in 2012, we have been taking out stock-in-kind from our RRIFs as opposed to cash, continually increasing the dividend income coming from our non-registered account.  Having done this for almost 10 years, we are now in a position to fund all normal expenses just from that dividend income.  Now the annual RRIF withdrawals just act as further on-going “boosts” to that income to help combat inflation.  The earlier in the year we make the RRIF withdrawal, the sooner we can start adding the additional dividend payouts to our income for the year.

This year, knowing that the dividend flood-gates may be unleashed, we only took out the government-mandated minimum for our RRIF withdrawals.  As we have done the previous 3 quarters, we will wait for the 4^th quarter dividend declarations by the banks before determining whether we should make a second RRIF withdrawal and if so, how much.  If the bank dividend increases are declared, we can recalculate the projected income that our non-registered account will produce.  Doing so will protect us from taking too much out from our RRIFs and inadvertently bumping us into higher tax brackets.

If the restrictions on the banks continue through this next round of dividend declarations, then we will know that no raises will come this year.  But sooner or later, they will come, so we would take the same precautions next year.  Not exactly a bad “problem” to have!

2020 (COVID) Year End Review: After Eight Full Years of Retirement

What a crazy year 2020 has been!  For almost a year and counting, COVID 19 has impacted the lives of people around the world in every conceivable way, ranging from economics, finance, social interactions, physical and mental health.  As mentioned in previous blog entries, the situation for my husband Rich and I has luckily insulated us from most of the economical effects of the pandemic.  Since we are now seasoned retirees with a stable and established income flow, we have not had to worry about how to continue doing our jobs in this strange and danger-fraught environment, or worse yet, about losing our jobs or struggling to pay our bills.  We also have been able to stay healthy and don't have any close friends or family who have been stricken with the virus.  We count our blessings and our hearts go out to all the people who have been adversely affected by this deadly disease.

In light of this strange and (excusing what has now become a hackneyed cliché) "unprecedented" year, it was not at all surprising that the markets tanked when the pandemic was first declared back in March.  What does seem astounding is how quickly stocks rebounded.  Within a few weeks, prices were back on the rise and by year end, the TSX/S&P Index actually closed 2% higher than where it opened on January 2, 2020.  Much of that recovery was fueled by the surge of tech stocks such as Shopify, as well as cannabis, lumber and gold stocks.  Is it the modern spin on an old adage that when hunkering down for the Armageddon, you should stockpile gold bars, SPAM and weed?  

Since we only care about dividends and not the value of our holdings, it has never been our strategy to chase the latest "flavour of the month" fads hoping for quick gains.  Instead we continue to hold time-tested stalwarts in unglitzy industries such as Finance, Utilities and Transportation.  So our portfolio, which was down as much as 30% at the bottom of the crash, has not experienced the full impacts of the TSX/S&P Recovery.  Still, by the end of 2020, we were down less than 3% relative to the start of the year.  

Yet of only importance for us is the fact that despite suffering dividend cuts or stoppages from 7 of our stock holdings, the overall dividend payouts within our non-registered account (which sources our monthly income) rose by 2.6% while the dividends in our portfolio as a whole rose by just under 1%. This is because by the end of the 2020, out of the 40 companies that we held in our portfolio, 26 had raised their dividends.  A caveat to that last statement is the fact that 19 of these companies declared their dividend raises prior to March when COVID struck, and the ones that raised after often did so by smaller amounts than in the past.  Most of these increases sit in our non-registered account while almost all of the cuts reside in our registered accounts.  This is by design since we tend to move the larger or more stable companies into the account that pays our bills while leaving the riskier ones in the registered accounts in hopes of long-term growth.

The fact that we made it through a pandemic year and still came out ahead in terms of income continues to strengthened our confidence in our retirement strategy. If we can make it through the past year, we can make it through anything. Things continue to look up for 2021 with vaccines starting to become available.  This seems to be reflected in the market which continues to rise, as well as for our dividends.  Four companies in our portfolio (Telus, Enbridge, Atco and Granite REIT) have already declared dividend increases for first quarter 2021.  Unfortunately there still seems to be a regulatory ban preventing any of the major banks from raising their dividends.  Hopefully this will be lifted as more vaccines roll out.

Of the 7 companies that cut their dividend, 5 of them (Chemtrade, Cineplex, Husky, Suncor and Corus) have lost so much value that they are not worth trying to dump in order to buy better yielding stocks.  We will just let them ride out the pandemic and hope for even a partial recovery.  Luckily these are mostly in our registered accounts which we now withdraw from just once a year and no longer count on for monthly income.  

Of note is AW.UN, which eliminated its dividend in March 2020 when the initial lockdown meant that ALL restaurants had to close.  But by July when eateries were allowed to reopen for takeout, this stock resurrected 62% of the payout.  As well, we received extra bonus amounts in  October and December.  This seems like a smart way to further revive the original dividend payout without committing to doing so every month.

In April 2020, Methanex (MX.T) eliminated 90% of its dividend payout and sank in price leaving us with a large loss in value.  In November on rumours that various vaccines were close to becoming ready for distribution, the price started to rise again.  Uncertain about whether this streak would continue, once the price rose to the point where we were actually in a slight profit situation, I decided to dump the stock and replaced it with one which paid a decent dividend.  To my chagrin, the share price of MX continued to soar and had I waited, we could have reaped an even higher profit with which to buy even more shares of the new stock.  But having been burned before waiting too long to try to maximize profits, I had to remind myself that we only care about dividends.  I had achieved my goal to replace a the dud that continues to yield almost nothing to one that paid 90% more per share.  Still, I guess it is just human nature to a little bit miffed at the lost opportunity😊 .

Each year I perform a review of our holdings in terms of market capitalization and sector diversity.  For the most part, we stand pat in terms of which stocks we hold, as long as they continue to pay us a healthy dividend.  So most of the changes in terms of market capitalization were due to the COVID-driven loss of value in the companies.  Only 13/40 of our companies showed any value growth after 2020, while the rest lost value with some showing a negative 1-year returns in double digits.  As a result, our large and medium cap percentages declined while our small cap increased, even though we mostly held the same companies.

Similarly the change in sector holdings were mostly driven by mergers and splits initiated by various companies, as opposed to any active trading on our part.  Power Corporation (POW.T) re-absorbed its financial arm PWF.T which it had spun off  years ago.  Unfortunately this transaction generated a small but unexpected capital gain for us in our non-registered account.  The amount was not large enough to bother selling stock to trigger an offsetting capital loss.  We do live in fear that one of our companies that has soared in price since purchase will one day be bought out and trigger a huge capital gain that we will not have enough loss to offset.

Brookfield, which already has numerous corporations with varying interests under its umbrella ranging from asset management, renewable energy and infrastructure, created two more.  BIP.UN and BEP.UN are both income trusts that pay distributions which may not be entirely "eligible dividends" that qualify for the dividend tax credit.  Historically the distributions have also included foreign dividend, interest income, capital gains and return of capital.  Each of these Brookfield subsidiaries spun off a new corporation (BIPC and BEPC respectively) that pays 100% Canadian eligible dividends as opposed to distributions.  This is of great interest to us since we would like to hold Brookfield in our non-registered account but have previously held off because of the accounting headaches of calculating ever-changing adjusted cost base (ACB).  These new corporations now give us an opportunity to do this, but first we would like to grow more shares tax-free within our registered accounts via the Dividend Reinvestment Program (DRIP). 

Speaking of DRIPs, after the market plunged in March, we started to DRIP in our registered accounts to take advantage of depressed prices in companies whose holdings we wanted to grow.  Our only other major trade was to sell Rio Real Estate (REI.UN) in January 2020 for a slight gain.  Because REI.UN had not raised its dividend since 2018, in  we replaced it with Granite REIT (GRT.UN), which has raised its dividend every year since 2015.   We were rewarded when Granite raised its dividend in 2020 and now has announced its annual dividend raise for January 2021. 

Another interesting acquisition/merger was announced 4Q2020 but did not finalize until January 2021 when Cenovus Energy (CVE.T) bought out Husky Oil (HSE.T), whose shares I own in my Registered Retirement Income Fund (RRIF).  For each share of Husky,  I received 0.7845  shares of Cenovus as well as 0.0651 of a "purchase warrant", providing an opportunity to buy additional Cenovus shares at the set "strike price" of $6.54.  Similar to a stock option, the purchase warrant has an expiry date—January 1, 2026 in this case.  But the purchase warrant can also be sold in and of itself and has its own stock ticker (CVE.WT), average cost and market price.

Both these companies (and in fact the entire Oil Sands Industry) have been struggling for years now and the pandemic has not helped.  CVE and HSE have 5-year returns of -56% and -47% respectively and both slashed their dividend payout last year.  Having the former buy out the latter seems like a case of "The Blind Leading The Blind", even though this acquisition will turn Cenovus into the 3rd largest oil and gas producer in Canada.  Hopefully synergy and cost savings from redundancy elimination, plus the pending end of the pandemic will lead to brighter days for this company.

So the question remains regarding what to do with my existing Cenovus shares plus the purchase warrants.  If CVE continues to pay no dividends,  I will hope for the share price to rise to the point where it would be worthwhile to sell my shares and buy something else.  The same thing applies to our warrants.  I have 5 years to wait for prices to rise before exercising my warrants.  Whether I use the warrants to buy shares at the strike price and then sell for a profit, or just sell the warrants will depend on the price differential between the two options.  

As an example, as of this writing, the share price for CVE is $7.83 while the strike price is $6.54.  Buying today at the strike price and immediately selling would net me a "profit" of $1.29 per share.  At the same time, I could sell each warrant today at $3.53 which nets me to profit of $2.24 (the price for sale of the warrant less the profit I could have made from exercising them and reselling the CVE shares).   Currently the sale of the warrant has a "time value" since there is so much time remaining before it expires and therefore time for CVE price to rise further.  This is why the profit made from selling the warrant is more than that of exercising it.  This time value will decrease as we get closer to the expiry date. 

Currently the differential between the stock price and the strike price is not large enough to do anything.  I will monitor the situation over the next few years to see what happens.  When I do act, I would have to ask my broker to make the transaction and probably would have to pay the $9.99 fee for each transaction.  I don't have enough warrants for any of this to make a noticeable impact on our total portfolio value, but it was fun learning about how this all works.

Reviewing our actual spending for 2020 versus the estimates created at the beginning of that year, we found that we spent 33% less than anticipated.  Compared to 2019, our spending was down almost 30%, as opposed to the expected increase in spending due to inflation.  The pandemic took away most of our opportunities for discretionary spending.  We cancelled all our planned vacations for 2020 and 2021 and luckily received most of our money back.  Similarly we received refunds for most of the theatre tickets and other events that we pre-purchased, although a couple of venues only offered credits for future shows.  We also saved on transit since there was no where to go, and a bit on medical by deferring our regular dental cleanings while in lockdown.  Interestingly, our food bill came out just about even. While we could not go out to dine at restaurants (other than a slight reprieve in the summer), we did order takeout regularly and cooked at home more, leading to a rise in our grocery bill.  The increase in our grocery bill almost exactly offset the decrease in dining out.

We ploughed the extra savings into our "high-interest" savings account with EQ Bank, which unfortunately dropped its interest rate several times during the pandemic, starting at 2.4% and ending up the year paying 1.5%.  However this is still significantly better than my savings account with Simplii Financial, which now pays 0.10%, while the major banks pay even less according to the Cannex Deposit Account Report.  The unexpected savings come at an opportune time since we will probably need to replace our 16-year-old car in 2021.

As described in an earlier blog, aided by the market crash at the start of the pandemic, Rich was able to collapse his locked-in Life Income Fund (LIF) because its value fell below the "Small Amount" rule.  Rather than removing this value as cash or stock-in-kind, which would have increased his net income by over 20K, he opted to move it tax-free into his Spousal RRSP which he has not yet turned into a RRIF.  The value of the withdrawal was added to his net income but he received a corresponding RRSP contribution deduction for the same value to offset and reduce his net income by the same amount.  The result of this is that we now have one less account to worry about, no longer have to calculate minimum or maximum annual withdrawal requirements for this LIF and no longer have to suffer from the snail's pace at which one is allowed to draw down a locked in retirement fund.  Unfortunately although I try to take out the maximum allowed from my LIF each year, unless I encounter another opportunity like last year, it will take me decades before I can collapse my account.

For many years now, we have worked to move dividend paying stock in-kind from our registered accounts into our non-registered account.  We are now at the point where we can fund most of our annual expenses from the Canadian-eligible dividends paid to that non-registered account.  Our annual RRIF/LIF withdrawals just add more dividends to it.  Along with any increases in dividend payouts from the stocks in the non-registered account, the added dividends from the RRIF/LIF withdrawals act as income growth to counter inflationary impacts in our expenses.

The goal for our RRIF accounts is to reduce their values as much as possible before we turn 70 in order to minimize Old Age Security (OAS) claw back.  Since 2019, we have been using the following strategy.  At the beginning of the year, we take out the minimum required withdrawal as stock in kind into our non-registered account.  For this minimum withdrawal, no withholding tax is required.  As part of this minimum, we usually also take out any accumulated US dividends to bolster our cache of US cash in our US bank account.  Whenever we can travel to the States again for vacation, we will be ready to pay for most of it in US currency without needing to incur exchange rates. 

Throughout the year, we accumulate Canadian dividends paid as cash in our registered accounts to prepare for the next step. Towards the end of the year, we make another small in-kind RRIF withdrawal.  But instead of simply paying the required withholding tax for this withdrawal, we request to pay enough tax to almost cover our entire tax burden from all of our income sources (i.e. LIF and RRIF withdrawals, dividend income from our non-registered account and any capital gains incurred).  We use the free tax program StudioTax from the previous year to approximate what that tax burden would be and to make sure that our total income would not bump us into too high of a tax bracket.  The result of this is that by the time our income tax is due in 2021, we will have paid most of what we owe and further reduced the size of our RRIFs by paying the tax burden from within these accounts, rather than needing to dip into our savings.  It means that we pay our taxes a few months earlier than required, but the opportunity cost is inconsequential, and again, I would like to think that we are helping the economy in some way.

Based on the estimate from the 2019 StudioTax program, I paid enough withholding tax to cover all but a few hundred dollars of my projected 2020 tax burden.  When I plugged the same income and withholding tax numbers into the 2020 version at the beginning of this year, I was pleasantly surprised to see that instead of needing to pay a small amount of remaining income tax, I am now expecting a small refund!  This is partly due to the personal exemption and climate change rebate amounts, which increase each year since they are indexed to inflation.  Additionally, the marginal tax ranges have changed so that a higher amount of income is taxed at a lower rate.  For example, in 2019 the first $47,630 is taxed at 15% while in 2020, the first $48,535 fall under this initial tax bracket.  The same trend continues for the rest of the brackets.

That sums up the financial aspects of our COVID-influenced 2020.   Through a year of social distancing including two periods of full lockdown in Toronto without the ability to travel, dine out, go to live theatre, movies, or exercise at indoor gyms and tennis bubbles, we had to find creative ways to entertain ourselves and keep physically fit.   All in all, it has not been so bad and there have even been some benefits to our new routines.

Other than the few blissful months in the summer when COVID numbers were relatively low and we could do more outside due to the nice weather, our main source of exercise has been walking.  Looking for variety in our daily walks, we have covered every nook and cranny of streets and neighbourhoods within a 10-12km radius around our condo.  In doing so, we have come across new discoveries in terms of cool architecture, outdoor public art, colourful graffiti in hidden laneways, interesting lawn ornaments and sculptures in front of private homes, parks and ravines and many more sights that we never took the time to notice before.  Instead of going to the gym, I do exercises by following various Youtube videos.  Not being able to play tennis indoors, we suddenly have drastically lowered our acceptable temperature threshold for playing tennis (and ping pong!) outdoors, even with limited mobility while laden with heavy coats, hats and mitts.

Although we could not dine out at restaurants, we still wanted to support the local eateries and try to get take-out at least once a week.  We soon discovered that many of the high-end restaurants that we have wanted to try are offering 2-5 course set meals for pickup or delivery, usually at discounted prices compared to dining in, and without the hefty liquor bill that a night out would typically include.  Ordering is easy through the online Tock application that consolidates dining opportunities into one website.  We always pick up our order rather than having it delivered since we want the restaurant to get all the profits.   One restaurant that had been extremely difficult to get a reservation for prior to the pandemic is Alo.  By contrast, it has been fairly easy to order their take-out set meal and we have dined on their delicious offerings twice now.

As a replacement for the loss of live theatre, we have taken full advantage of all the free online theatre that was offered at the beginning of the pandemic.  This included previously filmed plays and musicals from U.K.'s National Theatre Live, Andrew Lloyd Webber's "The Show Must Go On" series, New York's Lincoln Theatre, Stratford Festival and more.   The free offerings seem to have dried up now, but there are still paid online theatre opportunities for relatively nominal prices compared to the cost of a live theatre ticket.  Most recently we have signed up with Musical Stage Company to stream 3 musicals for $90 CDN which each include a pre and post show talk.  The price is for the household so the cost for the two of us comes to $15 each per show.  Had we more people in our household, it would have been even cheaper per head.  While the online experience is not the same as being live in a theatre, it has been a great substitute in the interim.

We belong to the TIFF Secret Movie Club where we would go down to the Bell Lightbox once a month between October to April to watch a movie and then have a Q&A with the director or actor.  Similarly we regularly sign up for interest courses taught over 6-week periods at the Hot Docs Theatre.  During the pandemic, both of these events have gone online and I actually enjoy this format more than attending in person. Rather than requiring to attend the movie or lecture at a fixed time, I can stream the event repeatedly at any time over a fixed period of days, in the comfort of my own home, and in my jammies if I so choose.  In each case, the cost per household is also significantly less than the cost per person of the live version.  I would love for this to continue even after the pandemic is over.

It is not easy to replicate the experience of traveling abroad.  Rich and I both like visiting vibrant cities with interesting art cultures, so we were delighted to find that so many art museums have increased their online presence by offering video talks about works within their collections.  The Frick Museum in Manhattan produces some of the best series that we have found so far.  In particular, in each episode of their "Cocktails With a Curator" series on Youtube, a curator takes a single work in the Frick Collection and describes it in great detail, providing historical context regarding the artist and time period of the work, as well as analyzing the piece in terms of style, technique and subject matter.  The curator also pairs the talk with a cocktail, somehow related (sometimes extremely tenuously) to the work.  This adds to the fun of watching the video.  They have another series called "Travels With A Curator" that describes a remote, often exotic location that has some sort of link to a work within the Frick Collection.

When we were initially put into lockdown for the first wave of the COVID and forced to stay just within our own household, Rich and I jumped with both feet onto the "Zoom Video Chat" band wagon.  I signed up for premium Zoom which allows me unlimited meeting durations for groups of more than 2 Zoom windows.  We proceeded to hold social chats with friends and family across the country, Zoom dinners and pizza parties, book club meetings, games nights, art discussions and more.  In those first few months where everyone we knew was stuck at home with little to do, we probably had more contact with some people (albeit virtually) than we ever would have normally.

So as we head into 2021 with the pandemic still raging, we will continue to try to make the best of things and look forward to the day when mass vaccination will free us to go out and socialize again.  With both pent up energy and extra savings, we will be ready to party and splurge.

References:
2019 Year in Review
2018 Year End Review
2017 Year End Review
2016 Year End Review
2015 Year End Review
2014 Year End Review
2013 Year End Review
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