Diversification the Key to Our Dividend Investment Strategy

Our main strategy for generating post-retirement income is to attempt to live off the dividends from our stock holdings. In our book "Retired at 48 - One Couple's Journey to a Pensionless Retirement", we describe in detail how we try to reduce risk through diversification.  For example, we buy many different stocks in various sectors and set limits for the amounts we would hold in each stock depending on market capitalization, setting lower limits for smaller, riskier companies and higher limits for larger, blue chip companies which are presumably safer and have a history of raising their dividends. 

The book also describes how we use the Globe and Mail Watchlist tool to check on the performance of our stocks.  In particular, we regularly monitor the dividend amount for each of our stocks, prepared to take action if necessary if one of them declares plans to significantly cut their payout.  Since we started with our dividend strategy many years ago, a majority of our stocks have raised their dividends, some of them multiple times on a regular basis.

Recently we did have one of our stocks take a relatively large dividend cut.  We purchased a small-cap stock in the health industry called CML Healthcare (CLC-T) in an attempt to diversify into different sector from the financial, telecommunications, energy, utilities and REITs that we are mainly concentrated in.  Based on our strategy of limiting exposure to smaller companies, the shares we acquired accounted for only about 1% of our portfolio.  At the time of purchase, it was paying a relatively generous yield of over 7%.  For various reasons, the company's earnings declined to the point that the dividend payout was no longer be sustainable.  This resulted in the share price plummeting by over 25% and the yield rising to an unreasonable level of over 11%.  The writing was on the wall that there would be a cut in the dividend, so we evaluated our options. 

We realized that even after the proposed 30% dividend cut from $0.75/share to $0.53/share, the yield would still be higher than most of our other stocks.  Because we owned so little of this stock, the net loss in dividends did not noticeably impact our annual dividend income.  Selling these shares would generate a capital loss that was significantly larger than the minor loss in dividends, and there was no clear replacement stock that could do better.

So in this case we decided to continue to hold the stock.  Our dividend strategy is designed so that no dividend cut in any single stock should create a major blow to our portfolio.  So far, this has worked out well.

We also encountered two scares that turned out to be false alarms.  The first was when it appeared that Telus (T-T) had cut their dividend by 50%!  Further investigation showed that Telus had actually executed a stock split.  So although their dividend payout was now 50% less, we also owned double the number of shares, each worth half the price.  The net result was the same... phew!

The second scare came from a data error from the Globe and Mail Watchlist.  For one solid week, both the Watchlist and the Saturday Globe and Mail business page showed that Cineplex Inc. (CGX.T) had dropped its annual dividend from $1.35 to $0.48, changing the yield from 4.2% to 1.39%.  This didn't make sense, since there was no news announcement or drop in share price (which usually accompanies a significant dividend decrease).  Checking both Cineplex's corporate website and other websites such as Reuters indicated that the Watchlist data was not correct.  In fact, rather than dropping their dividend, Cineplex has announced they would raise their dividend to $1.44.  We contacted Globe and Mail's globe investor support and advised them of their data error, which has since been corrected.  Another bullet dodged!

All in all, our buy-and-hold dividend strategy for generating retirement income continues to work well for us and we are insulated from the impacts of rollercoast stock prices as long as we continue to concentrate only on the stability of the dividends. 

Our recent experiences also accentuate the importance of paying close attention to your portfolio and being prepared to take action to re-balance when necessary.

Tips for Reducing Costs of Live Entertainment

We really enjoy watching live theatre, but tickets can be expensive.  We probably watch more shows in a year than the average patron, and have employed the following ways to minimize this expense.

We tend to buy tickets in the lower price range rather than going for the best seats in the house.  We don't mind sitting further back, opting to see many shows from afar rather than a few shows up close.  However we are mindful of sight-lines.  We have learned that we usually prefer seats further back and closer to the centre, rather than way off to the side, or even up too close, where our view is obstructed from part of the stage.  It helps to be familiar with the seating configuration of the major theatres and understand the implications of various locations.  We once watched a play from the centre of the first row of the Bluma Appel theatre, and found ourselves so close to the stage that we were craning our necks to see the actors and had a clearer than desirable view of their nostrils.

Subscriptions to a series of plays often offer a healthy discount over purchasing tickets separately for individual shows.  I have held my Mirvish seasons tickets for over two decades and have received as much as 40-60% off the base prices.  We were watching up to 7 shows for the price of separately buying tickets to 2 or 3 of them. Following our strategy of seeing more for less, our subscription falls in the lowest price range, although I've had this subscription for so long that I now hold some of the best seats within this section.  For the 2012-13 season, we paid $179 for 6 musicals (love musicals!!).  So I'll be watching The Book of Mormon for under $30.  The Mirvish subscription is one of the most flexible as it allows free ticket exchanges up to 48 hours before the show.

Now that we are retired, we are much more flexible as to when we can attend shows.  Often, matinee performances are offered at a lower rate, especially those held during weekdays.  We recently watched a Tuesday afternoon performance of the Toronto Symphony Orchestra Plays James Bond for $29 per seat.  This option was not available for the same show later that evening.  You need to be careful trying this with longer running shows, because often the matinee performance will feature the understudy as opposed to the star.  Some shows offer preview performances at a lower price.  You get a discount for agreeing to see a show before hearing the reviews. The Stratford Festival usually has a preview session for their shows early in the season.

One great tip I've discovered is that you can sometimes save most or all the online or over the phone service charges and extra fees by purchasing your tickets in person directly from box office, as opposed to paying for the convenience of buying online or over the phone.  I have had savings of over $20 for two tickets by going this route. 

If you are willing to wait for a sale and possibly miss watching a show, there are many opportunities to score cheaper tickets.  Some theatres such as Mirvish offer same-day, limited "rush seats" or promote ticket deals towards the end of a show's run.  Group discount websites like Groupon or TeamBuy occasionally offer up theatre deals, especially for smaller or less popular shows that need the attendance boost.

The shows at smaller venues like the Factory Theatre, Tarragon, Lower Ossington, Hart House Theatre, etc. are usually offered at a much lower price and sometimes even have a "Pay What You Can" day.  I often prefer the lesser known, more intimate shows over the big blockbusters that are sometimes overhyped.  One of my favourite shows from a few years back was "Ride the Cyclone", performed at the Theatre Passe Mureille.  I enjoyed this smart, dark comedy of a musical as much as I did watching War Horse and much more than The Wizard of Oz.

Once a year in July, we go for really small, sometimes experimental works by attending the Toronto Fringe Festival.  For a 12 day span, you can watch 45-90 minute performances for $10-$12, in all sorts of venues ranging from small theatres to wacky locations like a bar, a bra shop or a traveling bus.  You take your chances and often get what you pay for.  But every once in a while, a gem such as The Drowsy Chaperone or Kim's Convenience shows up at Fringe, becomes the theatre darling of the year and gets picked up by mainstream theatres for a professional run.

Net Filing Resulted in Tax Refund in 6 Business Days

As discussed in my previous post, I tried NETFILE (filing my income tax return over the internet) for the first time this year, using the free StudioTax software.  NETFILE fast-tracked the processing of my return relative to mailing in a paper form.  I received my tax refund into my bank account (for which I have pre-authorized deposit set up) in a mere 6 business days.

Next tax season will mark my first full year of early retirement, without any employment income from which my company already withheld taxes, or corresponding RRSP deductions to further reduce my taxable income.  For the first time, I will have to pay income tax as opposed to receiving a refund.  This means I will no longer be incented to file my return as quickly as possible, but still do not want to miss the April 30th deadline.  Using NETFILE immediately submits your return, so there is no need to worry about timing or delays from the postal service.

I can also pay my income tax online by setting up a bill payment with my bank.  I entered CANADA REVENUE in the search criteria and received the following options:

• CRA 2013 Installments
• CRA - Arrears
• CRA - Payment on Filing

The last one, "Payment on Filing" can be used for full payment of the upcoming tax bill.  The "account number" is your social insurance number.  Through my bank, I can either post date the bill payment or pay immediately.  I just need to ensure there is enough money in my chequing account to cover the amount owed.

It is quite convenient that this entire process can be handled online from the comfort of my home.

Studio Tax - Free Income Tax Program with Netfile Support

This year, Revenue Canada stopped mailing out paper tax forms and also ceased supporting telephone filing (Telefile).  While you can still pick up copies from the post office, print off PDF versions of the forms and hand-fill, or even fill them out online and then print them off, the real push is for people to use online tax software and submit their tax forms over the internet using Netfile.

Income tax software programs have been around for years.  TurboTax seems to be the most popular, with multiple versions ranging from $20-$100, supporting various types of income and deductions.  There have also been free online programs made available for people with really low income.

My returns were relatively simple in the past, so I usually did my taxes manually by hand, then either mailed in the paper forms or used Telefile.  This year, since it was more difficult to obtain the paper form and my tax return now included more sources of retirement income, I started looking into software options for filing over the internet.  In an article by the Globe and Mail, I learned about a Windows-based software called StudioTax that is free for everyone, regardless of income level.

The interface for StudioTax begins by gathering the information required to fill in page 1 of the T1 General form, including your name, address, date of birth, social insurance number, and info about your spouse if applicable.  Then it allows you to select which forms you received for your various sources of income, as well as choose from typical deductions including RRSP contributions, charitable donations, political contributions, tuition fees, expenses for dependents, and medical expenses.

Income Forms	Purpose, Sample Fields
RC62	Universal Child Care Benefits
T3	Allocations from Income Trusts
T4	Remuneration Paid (employment income), CPP contrib., EI contrib., Income Tax deducted
T4A	Pension, retirement, annuity, RESP, death benefits, research grants, fees for services,  and Other Income (not self employed)
T4E	Employment Insurance and Other Benefits
T4F	Fishing Income
T4RSP	RRSP income
T4RIF	RRIF Income
T4PS	Employee Profit Sharing
T4A(OAS)	Old Age Security (OAS) Income
T4A(P)	Canada Pension Plan (CPP) Income
T5	Investment Income (Canadian eligible and ineligible dividends, Foreign Income, Interest Income)
T5007	Worker’s Compensation, Social Assistance, Status Indian Tax Exemptions
T5008	Security Transactions – Capital Gains or Losses
T5013	Partnership Income – fishing, agriculture, business, etc.
T10	Pension Adjustment Reversal

StudioTax provides good help and several tutorials to guide you through the various processes, but in general it was quite straightforward.  It is merely a matter of matching the box numbers on the paper tax slips with the fields on the StudioTax forms, and entering the corresponding values in these fields.  Amounts for your chosen deductions are similarly prompted for.  These processes shield you from needing to understand the actual CRA tax forms, in terms of knowing which fields should be entered or how to perform calculations on the raw data.  However, if you have more specific needs that require further tax forms, you can select to add any of the actual Federal or Provincial tax forms and then fill them out directly.

Once you are done all the data input, the program plugs the numbers into the correct locations in the actual tax forms, performs the necessary calculations, and the resultant CRA tax return is presented to you for review.  There is an option to validate your entries and you will be warned of inconsistencies, or missing data.  Another option allows you to try to "optimize" your return, including looking for ways of better dividing up income and deductions between spouses in order to minimize the tax burden.

Finally when you are satisfied with your generated tax return, you can create a .TAX file that is saved on your hard drive.  You can then go to the  Canada Revenue Agency at http://www.netfile.gc.ca/ to Netfile.  You will be prompted to attached the .TAX form as part of this process.  In the past, you required a CRA Web Access code to perform the Netfile, and this code was sent as part of the paper forms mailed to you.  Since the mailing is no longer happening, the need for the web access code has been eliminated.

For this first usage of StudioTax, I wanted to verify my understanding of its calculations and compare them with my own.  So I still manually calculated the values of my tax return on the CRA forms, which are available at http://www.cra-arc.gc.ca/formspubs/t1gnrl/.  Rather than entering everything by hand, I selected the "PDF fillable/saveable" forms so that I could enter the values using the computer.  When I compared the two results, they matched exactly.  This made me feel more comfortable with using the software.  Next year, I will probably forgo the manual calculations and just let the tax program carry the load.

Income Trusts - A Lesson Learned

In keeping with the retirement strategy described in our book Retired at 48, our portfolio concentrates on stocks that pay a steady dividend of 3.5% or higher, which we can withdraw regularly to pay our bills.  In building up this portfolio, we recently added several investments to our non-registered account that seemed to fit our criteria—relatively high dividend yield, good price to earning ratio, "Buy" recommendations from the analysts.  They also turned out to be income trusts, and we did not totally understand the tax implications of holding them outside of a RRSP or TFSA.  This tax season, we found out.

While the income trust pays on a regular basis (monthly or quarterly) similar to other Canadian stock, the money received may not be considered to be "eligible dividends", which qualify for preferential tax treatment.  The payouts from our various income trusts each contain more than one of the following components, many of which are taxed fully without the benefit of any type of reduction or tax credit.

Payout Type	Tax Implications
Eligible Dividends	Dividend tax credit which lessens the tax burden
Ineligible Dividends	Smaller dividend tax credit than eligible dividends
Foreign Dividends	Treated as regular income and taxed fully
Interest Income	Treated as regular income and taxed fully
Other Income	Treated as regular income and taxed fully
Capital Gains	50% of capital gains taxed after reduce by capital losses
Return on Capital	Reduces the purchase price of stock, so increases capital gain on sale

A new concept for us was the "Return of Capital" component of an income trust payout.  This amount is not initially taxed as income, but instead reduces the purchase cost of the income trust shares.  When you finally sell the stock, applying the reduction to the initial purchase price affects the calculation for capital gain or loss.  If you hold the stock for long enough, the price could reduce down to zero, making the entire sale price a capital gain.  If you still continue to hold the stock after the price is already zero, then you pay capital gains yearly on the additional payouts.

We had been careful to place our foreign stock and fixed income investments, such as bonds or GICs, in our registered accounts in order to shield ourselves from their tax implications.  We now realized that the income trusts needed to be treated in the same way, or we would be facing significant tax burdens which continue to increase the longer we hold the shares.

Having learned this expensive lesson, we will now take a one time hit to swap holdings, moving all income trusts to our registered and moving eligible dividend-baring stock to the non-registered.  Since we will trigger capital gains on the income trust sales, we will also sell any stock currently in a capital loss position to temper this.  We will incur the $9.99 administration fee per transaction on each sale and purchase.  Since I am buying and selling the same stock, possibly within the same day, I will try to stagger the buy and sell prices at least enough to cover to costs of the trades.  I have already successfully accomplished this for one of our stock and made a tiny profit in the process. 

Another advantage of moving the income trusts into the registered accounts is to save the hassle of calculating the tax owed on a yearly basis (let alone keeping track of the accumulating return on capital).  This is not an easy task compared to the eligible dividends.  It took several reviews of the CRA tax guide and reading multiple websites to get a good understanding of what needed to be done.  The T3 slips for income trusts also come a month later than the other tax slips, leaving less time to file your income tax.

Currency Exchange Tip

We will be vacationing in Europe this summer and wanted to buy Euros for spending money.  We contacted several of the major banks, and a currency exchange on the same day to compare rates.  On the day in question, the various banks were offering around $1.40 per Euro.  By contrast, the rate given by Calforex Currency Exchange was only 1.3532.  Based on online reviews, Calforex usually offers better rates than the banks.  They do apply a service charge per transaction of between $2.50-$3.50 depending on the size of the purchase.  They are conveniently open on the weekends and accept cash, bank draft or debit, allowing you to withdraw funds directly from your bank account (assuming you have sufficient withdrawal limits).

They offer another feature that we may try out in the future.  They have a Buy Back Option for repurchasing up to 50% of the currency purchased, at the same rate of the original purchase.  The original purchase must be at least $1000 CAD and the money must be returned within 30 days of the original transaction.  This protects you from being stuck with purchasing more currency than you actually end up using.



Calforex Currency Exchange

www.calforex.com

Reduce Vacation Costs by Home Swapping

The largest expense on our annual budget is travel.  Being retired and having all this free time to travel is a double-edged sword.  During our working years, our jobs limited us as to when and for how long we could go on vacation.  Now that we are released from those restrictions, the world is our oyster, but we need to be careful not to overspend our pearls.

We use various strategies for keeping our travel budget down, which we describe in detail in our book "Retired at 48 - One Couple's Journey to a Pensionless Retirement".  A particularly effective technique has been the home swap, where we stay in another family's home while they simultaneously stay in ours.  No money is exchanged, so both parties receive free accommodations including a kitchen, living area and sometimes even a garden or outdoor terrace.  Additional savings are achieved by the ability to be able to eat some meals "at home", and we get the chance to live like locals in our travel destination.

We are signed up on two websites that support home swapping, a free one called Geenee and a fee-based one called Love Home Swap.  As expected, we are getting much more traction on the fee-based site and are receiving many more responses to our swap requests, even if those responses are to decline.  The assumption is that if you are going to pay money to a member, then you are serious about swapping.  Having said that, we were still able to previously complete two home swaps using the free site, with a trip to Chicago and one to Paris, as described in our travel blog.

It is not easy to find a swap match.  You need to find someone else who wants to visit your location at the exact same time that you are visiting theirs (unless you have a secondary property to offer for a non-simultaneous swap—unfortunately we don't).  Persistence is the key.  Once we retired and joined the new fee-based swap site, we sent out almost 100 requests to homes in a multitude of locations that interested us.  We offered up a wide availability of dates and durations that we could travel.  We received a bunch of rejections from people who didn't want to visit our city, but were grateful that we were actually getting any type of answer at all, unlike with the free site.  We had several responses expressing potential interest for next year, which we've filed away to follow up later.  We also received several requests to swap with us for locations that were not high on our wish list, including Honolulu, Cayman Islands and Valencia, Spain.  We turned those down because we don't like sun vacations.  We also received a swap request for New York City, just one week after we returned from a visit there.. bad timing!

Our patience and perseverance finally paid off when we found a couple living in south of France who actually wanted to come to our city around the same time that we would want to visit theirs.  We chatted a few times on the website to ensure we felt comfortable with each other.  After agreeing tentatively to swap, we set up a Skype chat to get to know each other better.  We now have plans to spend a month in the Var region of Provence, in a small village surrounded by a medieval wall.  The cheapest rental accommodations we found for the same period in this area was over $4000.

Many people express concerns about "allowing strangers into their home".  There definitely needs to be a degree of mutual trust to make this work.  But remember that while they are in your place, you are also in theirs.  They will take care of your home as well as they hope you will take care of theirs.  So far, we have not had any problems with our swaps.  And since we are traveling for such a long period of time, it turns out it is more secure from an insurance perspective to have someone occupying our home rather than leaving it empty for extended periods.


We are looking forward to our next home swap adventure, and already making plans for the next year.

Retired at 48 Spreadsheet Calculators

In our book Retired at 48, we described how we used an online retirement planner provided by GlobeInvestorGold to predict how much money we needed to retire and how long that money would last.  It accepted a comprehensive set of input parameters including current and retirement ages, current investment total, current salary, projected annual savings and retirement expenditures. Taking these inputs, it created a chart showing how the money would grow during the saving years and draw down during the retirement years.  It basically told you whether you were on target to make your retirement goals with your current set of parameters, or whether you needed to save more, work longer or spend less in order to achieve these goals.

This tool provided an excellent starting point, but lacked some capabilities that we desired.  The biggest gap was in trying to plan our retirement as a couple.  We wanted to be able to represent our ages (current, retirement, life expectancy) and income sources (salaries, pensions) separately, but still treat the overall saving and spending targets as a couple.  The tool also did not reflect recent new legislation that increased the old age security payout age to 67, and did not allow for the options of taking Canada pension plan at an age earlier or later than 65.

To meet our needs, I reverse engineered the functionality of the tool, reproduced it in a spreadsheet and added the additional features that I desired.  Simulating the results of the online tool, the spreadsheet started with a year beginning balance, estimated investment growth plus additional savings to project a year end total during the saving years.  In the retirement or spending years, the spreadsheet tracked the retirement spending, offset by company or government pensions where applicable.  I added a column to update actual year ending balance, so that at the end of each year, the projection could recalculate with more accurate data to start the next year.  I also provided a column for entering actual savings each year, so that the actual investment growth could be tracked.  With these extra features, we were able to simulate a wide variety of scenarios, in order to land on the one that allowed us to achieve our early retirement.

Even after publishing the book, I have continued to enhance the spreadsheet to make it more easily adaptable to different situations.  My spreadsheet now provides a full set of input parameters for each spouse, including specifying the existence of a company pension, the age when it would start paying out and whether or not that pension is indexed for inflation. We will continue to use this spreadsheet to verify year after year whether our original retirement projections are still on track.  If they are not, we will have to take remedial actions such as reducing spending until we fall back in line.

As discussed in detail in the book, we use several other spreadsheets to track our investments and dividend payouts on a monthly basis. Filters are used to provide a quick summary of our investment holdings per account, per market sector, per market capitalization, etc. to ensure that we remain properly diversified in order to reduce risk in our portfolio.

There are a few extra worksheets that we use regularly, which were not included in the book:

This worksheet summarizes the dividend payouts per month or quarter per account.  This is useful for ensuring that there is enough cash flow to pay our bills each month.  If the dividend payout of any stock either increases or decreases, these tables highlight the impact to our monthly cash flow.

We keep one worksheet like this per year, to provide a snapshot of our portfolio by account, month by month, and year by year.  This helps us understand whether or not our portfolio is growing as expected.  We also keep a running total of the dividends paid out per month to our non-registered account, to aid us during tax season.

GET YOUR OWN COPY OF THESE SPREADSHEETS
I have created a sample set of my spreadsheet calculators and worksheets, including ones represented in the book and those that are not.  I will make them available to anyone who has purchased my book and wants to try using them.  Simply send an email to retiredat48book@gmail.com and specify the full name of the person to whom the book is dedicated.  I will email you back with the spreadsheet.  If you have questions about the how to use spreadsheets, you can comment on this blog post.