Financial Freedom Update August 2024 – $81.5k in Dividend Income!

Welcome to the Million Dollar Journey August 2024 Financial Freedom Update – the first update of the year! If you would like to follow my whole financial journey, you can get my updates sent directly to your email, via Twitter and/or Facebook.

For those of you new here, since achieving $1M in net worth in June 2014 (age 35), I shifted my focus to achieving financial independence by building my passive income sources to the point where they are enough to cover our family expenses. Mostly through passive index and tax-efficient dividend investing.

Here is a little more detail on our passive income goals:

How it all Started – Original Financial Goal

I always find it interesting to look back at previous goals. Here was the big goal after hitting the Million Dollar Net Worth milestone:

Our current annual recurring expenses are in the $55k range (after-tax), but that’s without vacation costs (and no mortgage or car payments). However, while travel is important to us, it is something that we consider discretionary (and frankly, a luxury).

If money ever becomes tight, we could cut vacation for the year. In light of this, our ultimate goal for passive income is to have enough to cover recurring expenses, and for business (or other active) income to cover luxuries such as travel, savings for a new/used car, and simply extra cash flow.

Major Financial Goal:  To generate $60,000/year (after-tax) in passive income by end of the year 2020 (age 41).

Reaching this goal would mean that my family (2 adults and 2 children) could live comfortably without relying on full-time salaries (most recently a one-income family). At that point, I would have the choice to leave full-time work and allow me to focus my efforts on other interests, hobbies, and entrepreneurial pursuits.

Update: As a noteworthy update, with increasing inflation and costs of keeping teenage kids in activities, our annual expenses have increased to closer to $65k/year after-tax (as of 2023).

Achieving Financial Freedom:

You may be thinking, 2020 is long gone – what has happened since then? I’m happy to report that we reached financial independence in 2020 (a little ahead of schedule)! While the goal now is to continue building and reinvesting those dividends within the portfolio I’m finding that as the years go by, more focus is being put on indexing.

Having said that, even to this day in 2024, I’ve sold very little in dividend positions in favour of index ETFs. However, we plan on holding our TFSAs until later in life, we will gradually transition our individual positions to index-based ETFs – at least in that account. This is all to simplify our holdings (and life!) over the long term.

While I will often say that dividend investing is not for everyone (like those who are going for a traditional retirement and/or who have high income and are looking to invest in a taxable account), there is a lot of merit in dividend investing for those who aim to retire early.

Some of the benefits for early retirees include:

• Tax-Efficiency – Dividends as an income source are extremely tax-efficient if you have no other income.
• Reduces Sequence of Returns Risk – The stock market is volatile which is not great during the withdrawal phase of your portfolio – especially if you need to sell positions to fund your lifestyle. Dividend payments tend to come through even during the worst of bear markets (providing that you are diversified) taking the pressure off needing to sell when the market is low.
• Psychological benefits – It’s a big mind-bender going from being a saver with a regular paycheck to a spender withdrawing from a portfolio that you’ve spent years/decades building. It took me a while to make the adjustment, but one thing that did help me was seeing dividends regularly and automatically deposited into my investment accounts. Even better – getting regular raises from those dividends which has really helped during these inflationary times!

Of course, with any strategy, there are downsides such as:

• Time and effort – The time requested to research dividend stocks and to monitor them over time (ie. dividend raises and cuts). For me, I enjoy this part but is not for everyone.
• Lack of Diversification – If you are a dedicated dividend investor, you could end up with a very concentrated portfolio consisting of a few sectors. While some high-net-worth investors would advocate for high concentration, I would argue that the common retail investor should be as diversified as possible to maintain consistent (and at least average) returns over the long term. For us, we take a hybrid approach of dividend stocks for Canadian exposure, but index ETFs for global market exposure.
• Tax implications – If you have a high salary, any dividends received in a taxable account will get punished with income tax. For most investors, it’s best to invest in tax-sheltered accounts first, and if you reach your contribution limits, then consider a non-registered/taxable account.

Financial Independence Update – August 2024 – The First Update of the Year

So what’s been happening in the markets in 2024? First, let’s take a look at 2023 where the story was rising interest rates! So that means companies that are highly leveraged (ie. utilities, real estate companies) typically underperform, but on the other hand, bond prices will typically find their footing.. eventually! Fast forward to August 2024, and we already have two rate cuts! This means that bonds have turned bullish, and savings interest rates (and mortgage rates) have started their descent.

In terms of the broad market, 2024 thus far has been the year of artificial intelligence (AI) which has driven the markets higher. Any publicly traded company relating to AI has been on an aggressive bull run (see NVDA!). With the S&P500 index driven by technology stocks, the index has been on a tear, but interestingly, the index minus tech stocks hasn’t been as pretty. Regardless, the S&P500 is up 11.5% thus far in 2024 (not including dividends).

S&P500 YTD Chart

The TSX has also trended higher thus far in 2024. While it has been a bit of a see-saw ride over the last few months, the main Canadian index is up about 6% YTD (not counting dividends).

TSX YTD Chart

What should a young investor do? When you have cash available, close your eyes and continue buying. Research shows that if your time horizon is long enough, it’s not about timing the market, but time in the market.

How Often and When Do I Make the Decision to Buy?

I like to buy quality dividend companies (and indexes) when their valuations are attractive. In other words, when they are being sold off (ie. dip). You can see some of my favourite Canadian dividend stocks here.

The dividend growth strategy aims to pick strong companies with a long track record of dividend increases. Since the last update, there have been more dividend increases – check them out below.

2024 Dividend Raises

So far in 2024, the Canadian portion of my portfolio has already received dividend raises from the following companies:

• CU.TO (1% increase)
• MRU.TO (10% increase)
• CNR.TO (7% increase!)
• BIP.UN/BIPC (6% increase)
• CNQ.TO (5% increase!)
• NTR.TO (1.8% increase)
• BCE.TO (3.1% increase)
• BEPC.TO (5% increase)
• TRP.TO (3.2% increase)
• ENGH.TO (18% increase!)
• TRI.TO (10% increase)
• T.TO (3.45% increase)
• L.TO (15% increase)
• WN.TO (15% increase)
• FTT.TO (10% increase)
• H.TO (1.2% increase)
• SLF.TO (3.8% increase)
• BMO (3% increase)
• NA (4% increase)
• IMO (20% increase)
• EMP.A (9.5% increase)
• CPX (5.2% increase)

Top 10 Holdings

Our top 10 holdings move around quite a bit. This time, it’s a good mix of industrials, infrastructure, utilities, energy, telecom, and bank stocks.

In our overall portfolio, here are the current top 10 largest dividend holdings:

1. Royal Bank (RY)
2. Fortis (FTS)
3. TD Bank (TD)
4. Brookfield Infrastructure (BIPC)
5. Canadian National Railway (CNR)
6. Canadian Natural Resources (CNQ)
7. Enbridge (ENB)
8. Waste Connections (WCN)
9. Emera (EMA)
10. Telus (T)

*not counting index ETFs (they are my largest holding).

Dividend Income Update

As mentioned, there have been a number of healthy dividend increases. As you can see in the chart below, the dividend increases have really made a difference in increasing our forward annual dividend income to $81,500. Given enough time for portfolios to compound, slow and steady does work!

The dividends are counted from all of our family accounts including non-registered (including leveraged account via the Smith Manoeuvre), RRSPs, corporate investment account, and TFSAs.

With higher interest rates, some of you may be thinking about my leveraged investing account (Smith Manoeuvre account). While the required payments to my HELOC have grown substantially, I have also been withdrawing the dividends to pay down the HELOC which, as of this post, is breaking even. If you count the tax break, the dividends still come out ahead (prime is currently 6.7%).

Final Thoughts

If you look at the global markets on a daily basis, the dips and sell-offs (ie. volatility) can be scary! However, if you zoom out and look at the long-term trend, the dips are more of a resting phase before moving higher – maybe even an opportunity to buy more.

Regardless of market conditions, what also keeps my mind at ease is that the dividends keep rolling in. This is one of the major benefits of dividends for retirees – getting paid regardless of the markets being up or down! As with most things, there is no perfect solution. As previously mentioned, dividend investing is not best for everyone.

I’ve noticed that other dividend investors/bloggers are comparing their dividend income to a comparable income/hr.  $81.5k/year equates to about $41/hr in passive income (based on a 40-hour work week), and depending on how the investments are structured, most of that can be tax-free!

I wrote a post about withdrawing from your RRSP or TFSA where, with no other income in retirement, you can make up to $50k in dividend income (within a taxable investment account) and pay very little to no income tax (depending on the province). The benefits are even greater if you can split the dividend income with a partner/spouse.

If you are also interested in the dividend growth strategy, here is a post on how to build a dividend portfolio.  With this list, you’ll get a general idea of the names that I’ve been adding to my portfolios.

If you want a simpler investing strategy that outperforms most mutual funds out there, check out my post on the best all-in-one ETFs in Canada. I’m a fan of indexing as the iShares XAW is my top individual holding.

Keep investing that cash flow and stick with a long-term plan. Your future wealthier self (sooner than you think!) will thank you for it.