FP Answers: How can I maximize dividend income and CPP and OAS?

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In an more and more complicated world, the Monetary Submit ought to be the primary place you search for solutions. Our FP Solutions initiative places readers within the driver’s seat: you submit questions and our reporters discover solutions not only for you, however for all our readers. At this time, we reply a query from Ralph about how you can maximize dividend revenue wanted to complement CPP and OAS.

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By Julie Cazzin with Allan Norman

Q. How can seniors maximize dividend revenue wanted to complement Canada Pension Plan (CPP) and Old Age Security (OAS) throughout retirement? — Ralph

FP Solutions: Ralph, these are two coincidental questions for me, as I’m at the moment working with somebody transitioning from a dividend paying portfolio to a portfolio specializing in capital positive aspects. Why? For 2 causes. He desires higher management over his revenue and tax scenario, and his dividend revenue is robbing him of his OAS.

This shopper is incomes about $92,000 a 12 months in dividends on high of his different revenue. The $92,000 dividend revenue is reported as $127,000 on his tax return after being grossed up by the required 38 per cent, and it’s the grossed-up quantity of $127,000 that’s used to find out the OAS clawback — not the precise quantity acquired of $92,000. The dividend tax credit score isn’t utilized till after the OAS clawback threshold is utilized. That is one cause for switching to a capital positive aspects or complete progress portfolio.

The opposite factor that has occurred is that this shopper’s annual dividend revenue has grown over time. In his early retirement he was spending most of his revenue. However now, at age 82, he isn’t spending like he used to, however he’s receiving taxable quarterly dividends, and he can’t shut them off.

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A portfolio targeted on capital positive aspects has many benefits. For example, it provides you extra management over the timing that revenue is acquired by permitting you to promote investments solely when wanted. As properly, it might present a discount in tax as a result of capital positive aspects are extra tax environment friendly than dividends. It could additionally cut back the OAS clawback, and should enhance after-tax funding return. These are all nice issues.

Now, I’m not knocking dividend investing as a result of there are loads of profitable dividend traders. Dividend investing is a superb entry level to studying about investing, and Ralph, there are some easy strategies you and different do-it-yourself (DIY) traders can use to construct a dividend portfolio. Most likely probably the most acquainted methodology was offered by Michael O’Higgins, in his 1991 e book, Canines of the Dow, which makes an attempt to beat the Dow Jones Industrial Common by shopping for the ten highest-paying dividend shares obtainable from every year. Canadian David Stanley went on to create the Beating the TSX strategy, which additionally goals to speculate equal quantities within the 10 highest yielding shares by dividend yield, and his work continues to be being carried on at DividendStrategy.ca

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Dividend investing is just a inventory selecting technique. If you’re a giant believer in dividends, then a dividend technique could be the proper technique for you since you are prone to keep it up when the going will get powerful. Dividend investing will not be superior to all different funding methods and dividends are usually not freebies and shouldn’t be thought of as an alternative to Assured Funding Certificates (GICs). And keep in mind Ralph, similar to non-dividend-paying shares, dividend shares also can go to zero.

I keep in mind working with a shopper a number of years in the past who held shares of a dividend-paying inventory with a share value that was slowly falling. Throughout our conferences she would remind me that although the share value was dropping, she was nonetheless getting a dividend. Ultimately, the share value went to zero and so did her dividend. So, while you buy a dividend-paying inventory, keep in mind that it was issued by an organization and that firm faces the identical enterprise dangers as some other firm. There isn’t a assure.

Typically there’s a false impression that dividends are further or free. The considering is that, quite than proudly owning a inventory that solely appreciates in worth, why not put money into a dividend-paying inventory and get each appreciation, and dividend revenue?

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Dividends are paid by firm income and corporations can use these income to reinvest again into the corporate to hopefully develop and enhance share worth. They’ll buy excellent shares, which can push up share costs, or they could pay a dividend. When a dividend is paid you must anticipate the share value to drop by roughly the quantity of the dividend. It is because the capital worth of the corporate has decreased by the quantity of the dividends paid. That is evidenced by a Dimensional Fund Advisors LP research trying on the 10 largest firms within the S&P 500 from Dec. 3, 2018, to Oct. 31, 2023, which discovered that for each US$1.00 of dividend paid, the share value dropped by US$1.15.

In the event you settle for the proof that share values drop by roughly the quantity of the dividends paid, then what’s the distinction between taking a dividend or promoting a portion of your portfolio and creating your individual so-called dividend? On paper there isn’t any distinction between the 2 however the excellent news is that there are potential tax advantages and better anticipated after-tax returns.

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Ralph, if you wish to maximize your dividend revenue to complement your CPP and OAS, take into account as a substitute maximizing your funding progress inside your tolerance and promote your investments, in your schedule, to complement your revenue. You are able to do this confidently while you focus in your investments over time and incorporate your spending charges. This may even will let you take pleasure in extra of what your cash can convey you in the present day quite than tomorrow.

Allan Norman, M.Sc., CFP, CIM, supplies fee-only licensed monetary planning companies and insurance coverage merchandise by Atlantis Monetary Inc. and supplies funding advisory companies by Aligned Capital Companions Inc., which is regulated by the Canadian Investment Regulatory Organization. He will be reached at alnorman@atlantisfinancial.ca.

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