Making your annual mandatory RIF withdrawal

My wife and I are retired. We get by thanks in large part to the dividends earned by equities in our RIFs. Because of this, we are very protective of our equities. The more equities we have, the more dividends we have and the more cash we have to spend. We try to never sell any equities. We are buy and hold investors.

We meet the mandatory withdrawal requirements of our RIFs not by withdrawing cash but transferring equities. This is called making an in-kind withdrawal.

TD WebBroker posts your mandatory withdrawal amount. Simply click the tab labelled "RRIF Payments". Although there is no withholding tax, tax must be paid in the year following the withdrawal.

To make a withdrawal in-kind, to transfer equities from your RIF to either a TFSA (tax free savings account) or a non-registered account, you must call TD WebBroker and speak with a representative authorized to buy, sell and transfer equities.

Let's say you own a thousand shares of Enbridge (ENB) in your RIF. You ask the representative to transfer enough ENB shares to match your mandatory withdrawal amount as closely as possible. They check the market, find the stock is selling for $50 at the moment and divide your posted mandatory withdrawal ($13,779.06) by the price of the stock. The representative transfers 275 shares worth $13,750. There is no commission charged as no stock is bought or sold. The remaining balance of $29.06 is transferred as cash from the RIF to the TFSA.

If you are transferring stock and cash to a TFSA, you must ensure you have adequate headroom to accept the transfer. TFSA headroom is the sum of three amounts:

• deposit headroom remaining unused from last year
• the total dollar amount withdrawn from the TFSA last year. Funds withdrawn from a TFSA cannot be replaced in the year the funds were withdrawn. One must wait until the following calendar year to be able to replace the funds.
  
• the annual TFSA dollar limit. This has been increased to $6500 for 2023.

If the sum of these amounts is not large enough to accept the total transfer, the remaining balance can be moved to a non-registered account.

One nice perk provided by this approach is that the dividend income from the stock held in one's TFSA is tax free. Today, ENB is paying a dividend of $3.548 CAD annually or 6.52% based on Friday's closing stock price. The 275 shares transferred in the example would pay $975.70 annually and no tax to pay!

The annual withdrawal amount is based on your age and a percentage of the value of your RRIF -- a percentage that increases with each passing year. There tables detailing the percentage that must be withdrawn annually from both LIFs and RIFs. 

Here is a link to the table posted by the University of British Columbia. Note, as the UBC post makes clear, the maximum withdrawal amount in BC for a LIF may be higher than the maximum quoted in the tables. It can be equal to the investment return earned by your LIF in the previous calendar year. Mawer also discusses this in a post: 2022 LIF withdrawals: What you need to know.

Unlike LIFs, there is no maximum withdrawal limit for RIFs but one is wise to think carefully before withdrawing too generously.

With TD Direct Investing clients must contact WebBroker to make an in-kind withdrawal or transfer. If making a cash withdrawal, simply click the green "Make withdrawal" button. I always have a minimum withholding tax of 30% applied. Sometimes, I even have 35% withheld. I find this is necessary as no tax is withheld from the in-kind withdrawal. I do not want to learn I had too little tax withheld and now must pony up cash to cover an unexpected tax bill.

When making an RIFwithdrawal, always have all relevant information available:

• RIF account number
• amount of mandatory withdrawal
• name and symbol of stock to be transferred
• TFSA account number
• TFSA contribution headroom available (Check this carefully. Do not over-contribute.)
• Non-registered account number
• I do all the math in advance. This is important. The bank reps are busy. Mistakes happen.

The nice thing about the market being down at the moment is that we can move more stock to our TFSA and then it sits producing a tax free stream of dividend income and, if we are lucky, eventually a nice capital gain as well.

Brookfield Corp.

I like Brookfield in all its various forms. A fine corporation. Well run. Investor friendly. I owned some shares of Brookfield Asset Management (BAM) and then the announcement: Brookfield was splitting the asset management side of the business off. If that sounds puzzling, it was.

Brookfield Asset Management, the company, is now Brookfield Corp. (BN). Brookfield Asset Management (BAM) is now a pure-play alternative asset manager. TD WebBroker describes BAM this way: BAM is a leading global alternative asset manager that is well-positioned in higher-demand areas: real assets (which offer significant inflation protection), transition investing, and private credit.

In its new form, BAM is said to offer strong growth potential and is selling at a reasonable valuation. TD Securities has put BAM on their Action Buy List with the potential to deliver a gain of almost 50%.

The slimmed down Brookfield Corp. is now on the Action Buy List as well. The 12-month total return may possibly hit an incredible 88.1%.

I'm holding onto to my Brookfield investments and watching how they perform with great interest. If we have a bit of downturn, a soft recession as they are predicting, I may buy a little more.

 I don't own a lot of BAM (BAM) but it has done very nicely since its recent spin off from Brookfield Corp (BN).

TSX 60 Components

 TSX 60 Companies listed by dividend

Dividend Strategy: a blog worth reading

Click the link to go to a blog worth reading, especially if you own Algonquin Power & Utilities. And here is the link: Dividend Strategy -- The AQN Problem.

Don't stop with just checking out the AQN essay. Read about post on the investment method being promoted by this blog: The BTSX Method.

Algonquin Power down almost 50%

Algonquin Power & Utilities was the darling of the investment community for years. At the beginning of this month (November), MarketBeat called AQN a Moderate Buy. Two weeks later, it is a Hold. I wonder what it will be come December: a Sell?

I was slow to the AQN game but after years of watching from the sidelines, I bought into the play just over a year ago. Although I didn't pay the max, by today’s standard I paid too much. I bought on a dip and then that dip turned into a full blown retreat. AQN is now down almost 50% from its high of the past 12 months.

Yesterday AQN hit a new low for the year: $10.19. I added to my holdings. This averaged down my cost per share into the $15 range. At market open today, AQN jumped 2.8%. Although it was unable to hold on to its gains, it dropped to $10.07 in the afternoon, it did not lose more than a few cents. Maybe, just maybe, AQN is now struggling to get off its lows. I am crossing my fingers as some analysts are calling for AQN to fall to $7 or $8 Canadian.

Why has the bottom fell out of Algonquin? In a word, debt. I understand that too much of the AQN debt has a floating interest rate. Thanks to inflation-fighting increasing interest rates, the cost of servicing the AQN debt has been going up rapidly and dramatically.

TD WebBroker carried the following: We underestimated Algonquin's exposure to rising interest rates. Based on the current capital structure, 22% of the company’s debt has floating rates and a 100 basis point increase to reference rates affects annual net earnings by $16 million. This exposure is expected to increase as the company will utilize corporate borrowing facilities to fund a portion of the Kentucky Power acquisition in Q1/23.

The average price target at this moment appears to be about $15.30 (Cdn). A few analysts are telling investors to sell but most are saying to hold. Initiating a new position or buying more to average down, like I did, is not advised by the most analysts.

The bottom line here is that Algonquin may have trouble serving its debt and that means the dividend is expected to be slashed or even cut. If that happens, the stock price may suffer as well. But, it is possible an interest rate cut has already been factored into the price. Reducing, or even eliminating, the dividend will make AQN more profitable and thus the stock price may well increase on the news of a dividend cut.

For another viewpoint, please click the link: Should you catch the falling knife?

Recommendations discussed with a friend

Yesterday, I heard from a friend who is not a senior and yet both he and his wife are retired. I respect his thoughts on the market. This husband and wife team have a solid track record when it comes to investing. After our chat, I sent him an email listing some of the stocks we had discussed. The following is from that email.

• Cogeco (CGO) down 37% -- $54.24 at close Friday -- 4.61% dividend
• Brookfield (BAM.A) down 33% -- $52.64 at close Friday -- 1.36% dividend
• Quebecor (QBR.B) down 27% -- $23.87 at close Friday -- 5.03% dividend
• Restaurant Brands (QSR) Only down about 7% but be patient. May tumble.
• Vanguard ex NA High Dividend (VIDY) down 20% -- $22.21 at close Friday -- 4.82% dividend
• BMO Europe High Dividend Covered Call Hedged to Cdn (ZWE) -- $16.86 at close Friday -- 7.83% dividend
• I am mixing VIDY and ZWE for my ex N.A. exposure.
• You are right. TC Energy is down much more than Enbridge. TRP may be a better capital gain play than ENB and this may easily negate the dividend yield advantage enjoyed by ENB. My friend also mentioned that TRP is not carrying as much debt as ENB. With rising rates, the extra debt could be a deciding factor.
  
• Algonquin Power and Utilities (AQN) down 29% -- $14.24 at close Friday -- 6.82% dividend

I neglected to mention the one ETF that I actually tried to buy just a few days ago -- RIF. It is an ETF for those looking for REIT exposure. Most of the REITs are Canadian but about 10% are U.S. REITs. RIF is down more than 30% today and it is yielding more than 5%. I may buy 1000 shares in the coming week. And if drops another 10%, I will buy another 1000 shares at least.

Both Algonquin and Quebecor are begging to be bought at present prices. I'm trying to be patient and wait but I make no promises. I live on dividends and these two are looking damn good.

A Bear Market Discussion

The American market is nicely into bear market territory. The Canadian market, for the most part, is still in correction mode. Yet, Canadian REITs are well into bear market land and I have been buying. My average cost is well above the present cost of the REIT ETF I have been buying, RIF, but my average cost is still just entering correction territory. I am not put off by the fear of catching a falling knife.

If bear markets leave you frightened, click on the following link: Bear Markets by the Numbers: Sit Tight While Others Panic. Freelance Journalist Carla Fried, who specializes in personal finance and writes for a wide range of publications, does an excellent job with this piece from 2019.è

Fried's third paragraph nails it for me. She writes, "Bear markets are absolutely normal. They are a consistently recurring event. The more you understand about the mechanics and history of bear markets, the less you will panic when the next one arrives. Even better: If you are a long-term investor, there’s some upside to bear markets if you’re ready and willing to make a bold move. (More on that in a sec.)"ter

Following the thinking expressed above, this long-term investor may buy another big block of RIT if it is down again. I am a big believer in the upside of bear markets. Make the bold move and do not look back. The bull will coming roaring back sooner or later. I like to be ready.