We spend a lot of time on this site talking about being frugal. Spending less than you earn. Breaking convention and making sacrifices those around you are not prepared to make. Well, all that is important, but what do you do with all of that money you’re saving? We’ve already talked about Real Estate, and we’re well on our way to being successful landlords. In the past three months, CF and I both made our first stock stock purchases in Canadian dividend paying companies. I think this is as good a time as any to talk about some conventional finance and it’s role in our unconventional philosophy.
I love talking finance. It runs in my blood. My grandfather was a CIBC banker. My father is a Chartered Accountant. My uncle is a personal wealth manager with Scotiabank (full disclosure – I have no accounts or investments with CIBC or Scotiabank). Being frugal does not come as naturally to me as it does to CF – I spend more time figuring out how to maximize the money we have, rather than minimizing the amount we spend. That’s what makes our partnership work.
At the beginning of the year, we set ourselves the goal of increasing our passive income. Passive income has become THE buzz word in personal finance. It refers to the generation of income on a regular basis with little or no effort. In terms of investments, one of the best ways to generate passive income is through the acquisition of dividend paying stock. It’s one thing to say you want to invest in dividend paying stock, but it’s another to know how to do it and what type of account to open. Before I was comfortable in my investment strategy, I did some research into the various registered and unregistered accounts available in Canada. Here’s a summary of my findings:
Key features in relation to dividends:
How we use our RRSP accounts:
RRSP account benefits are maximized the longer you contribute to the plan. Thus, while they are not useful in terms of early retirement, they are a great way to minimize current taxes and ensure that we have money beyond early retirement and into the later retirement years. In terms of dividends, RRSP’s are the ideal place to hold foreign dividends. As we’ll see in a moment, tax treatment of foreign dividends is most favorable within an RRSP, so this is where we plan to hold most of our US and other foreign dividends in the future.
Key features in relation to dividends:
How we use our TFSA accounts:
This is where we are going to build our passive income producing empire. We know that capital gains won’t be taxed, regardless of when we withdraw the money, so this makes it the ideal vehicle for the start of our early retirement savings. To start building our TFSA accounts, we are focusing on Canadian Dividend stocks first, as they are not charged withholding taxes. As our portfolios get larger, we may consider foreign dividends. Foreign dividends will largely be held inside our RRSP accounts however, as they are not subject to the withholding tax.
As you’d expect, there are no special benefits with an unregistered account. Investments are all treated equal and subject to all tax laws relating to investments. I have not done a lot of research into these types of accounts. Currently we do not intend to make any investments in unregistered accounts until we have maximized contributions in both our RRSP and TFSA accounts.
Note that we have not started with a lot of money. It’s a common myth that you need a lot of money to start investing in stocks. I prefer to get started now, and diversify as I gain more money. To read more on starting your dividend portfolio, check out this awesome e-book.
Stock: Shaw Communications (SJR-B.TO)
Number of shares: 95
Price at purchase: $20.55
Dividend payment: $0.08 per share (paid monthly)
Dividend yield at purchase: 4.67%
Stock: Sunlife Financial (SLF.TO)
Number of shares: 60
Price at purchase: $30.14
Dividend payment: $0.36 per share (paid quarterly)
Dividend yield at purchase: 4.77%
Currently I am saving $100 per month towards stock purchases. I keep this money in a separate account until I reach $1000 and then I will buy a new dividend stock in a different sector. CF’s dividend savings are sporadic at the moment while she finishes school, when she will re-plan her contributions.
How are you using your TFSA account? Do you prioritize contributing to your RRSP over a TFSA account?