Tuesday, July 15, 2014

The power of dividends

When I sold my heritage English roadster, I put a chunk of the money into a tax free savings plan for my wife. That was less than a year ago.

It wasn't all that much money so I simply stuck the funds into two investments: some stock in Dream Office Reit (D.UN) and cash. Today that stock has appreciated in value but not by much. Yet, the total investment is up more than double the stock gain. Why? The D.UN monthly dividend.

As of today my wife's TFSP is up 8.1 percent. In a few more months her mix of cash and stock will be able to absorb a correction of ten percent and not dip into the red. Despite a double digit correction, she will retain more money in her TFSP than was originally invested.

And the cash portion of her TFSP is also generating a little income. Parked in TDB8150, an investment savings account, the cash is earning 1.25% while sitting on the sidelines. A little more than ten percent of my wife's TFSP savings is now in cash. It will soon be time to move it into a GIC paying about double the interest. (In today's low interest environment, some GICs are paying as well as bonds.)

With this mix of stock and cash, today my wife is enjoying an income of just more than seven percent. As the stock climbs in value and the cash dividends accumulate, the risk to the original investment is decreasing. By the time she is forced to begin withdrawing funds to live, this plan will have a solid mix.

I foresee the day when her TFSP pumps out enough money to balance her books in retirement for two full months. 16.7 percent of the year will be no longer require the financial support now supplied by RSPs. And funds taken from a TFSP do not enter into the equation for calculating the old age security clawback. An appreciated benefit.

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