Inkind Transfers To Meet Mandatory RIF Withdrawals

The average Canadian couple retires with approximately $800,000 in retirement savings. It is not uncommon for individuals to open RRIFs worth $450,000 upon retirement. For this reason, when I created an imaginary million dollar RRIF for an imaginary couple it was not an unreasonable amount.

RRSPs are designed for saving. At retirement RRSPs are converted into RRIFs structured to dole out the saved funds. The imaginary RRIF that I created is a self-directed portfolio of mainly dividend-paying stocks plus a smattering of ETFs. The imaginary RRIF Portfolio is posted here. Please, take a look.

If this had been a real portfolio, no withdrawals would have been made in the first weeks after its creation. Dividends must be given time to collect. Emulating reality, the first monthly withdrawal of $3,333.33 was made in August. By year end a total of $16,666.65 had been withdrawn. Despite the withdrawals, the portfolio value  grew to $1,042,126.11 by December 31st.

How did I choose a monthly withdrawal of $3,333.33? Four percent of a million is $40,000. Divide that by 12, for the 12 months in a year, and the result is $3,333.33.

With each passing year the minimum percentage that must be withdrawn grows. The mandated withdrawal for a 66-year-old retiree is 4.17%. This works out to a $43,456.66 withdrawal in 2024 calculated on the imaginary portfolio value of $1,042,126.11. 

I make my mandated withdrawals as in-kind withdrawals by tranferring stock from my RRIF to my TFSA. In the case of my imaginary portfolio, 1344 shares of Canadian Utilities (CU) at $32.33, plus $5.14 in cash is being transferred from the imaginary RRIF to a newly opened imaginary TFSA.

In the coming year, $2413.82 in CU dividends, which previously went to the RRIF, now go to the TFSA. These dividends can be withdrawn tax-free from the TFSA when needed. If there is not enough contribution room in the TFSA, the balance of the mandated withdrawal is transferred to a non-registered plan. This is the way I handle my own RRIF withdrawals. I try to live solely on the dividends.

A breakdown of the withdrawals, transfers and taxes follows:

• RIF value at market close on Dec. 31, 2023: $1,042,126.11
• Mandated withdrawal (4.17%) posted on Jan. 2nd by TD WebBroker: $43,456.66
• In-kind withdrawal (1344 CU shares @ $32.33+$5.14 in cash) to TFSA: $43,456.66
• No tax is withheld on mandated RRIF withdrawal but tax will be due in the following year.
• Tax, as much as 30%, is withheld on future withdrawals over the mandated minimum withdrawal.
  

To ensure there is no nasty income tax surprise in 2025, 30% is withheld from each monthly RRIF cash withdrawal to cover future tax demands . The cash withdrawals are made to provide the imaginary retired couple with the funds needed to live. As the RRIF is expected to yield at least $39,947 in dividends, payments of at least this amount should not be a burden. An estimated $11,984 will be withheld for future tax needs.

Thanks, in part, to the tax-free nature of the TFSA payments, more money is available for withdrawal per month in 2024 than in 2023. As dividends tend to increase annually, this is another reason the monthly payments will increase in the coming year.

I imagine you are wondering how much the imaginary portfolio is worth today, Jan. 5th, after all withdrawals have been made? Amazingly, it is worth more than its starting balance and don't forget that there is almost $40,000 in a TFSA as well.

My imaginary retired couple is very happy.

Click the link to see my next move: Next Move is to Diversify

Some rules I follow and some I don't

I like rules and the rules guiding investing are no exception. I follow a lot of them. But, I must confess, I break almost as many as I follow.

One rule I follow rigidly is the diversification rule. A portfolio should have no fewer than 20 investments and no more than 30. Too few and risk begins to rise. Too many and one might as well buy an index ETF. This is not to knock index ETFs but I am retired. I need income. I can buy two dozen dividend-paying stocks and get more income than I could from most index ETFs. Think ENB, TCP, T, TD, BMO, PPL, BCE, FTS, EMA and the list goes on.

One rule I do not follow is the fixed income vs. equity split that, according to the rule, one should have in one's portfolio. The traditional rule says subtract your age from 100 and allocate that percentage to equities. An updated version says subtracts your age from 120. I do neither. I simply invest in equities. Period. No fixed income investments other than cash and that cash is there to meet emergency expenses or to buy more equities when a bargain arises. Since cash today is yielding 4.55%, I do O.K.

I have too much home bias in my portfolio. Why? I have a dividend-weighted portfolio and dividends from Canadian companies carry benefits denied those dividends from foreign companies. But even I cannot completely ignore other markets, especially the United States. I have about 10% of my portfolio invested in XUS. If the American market pops, I benefit. If I were younger and did not need the dividends to live, I would own more but I am not and I don't. If the price declines in the future, I am planning on adding to my non-home investments by buying a little VIDY (Vanguard FTSE Developed ex North America High Dividend Yield Index ETF). Its yield today is 3.9%. VIDY delivers diversity, maintains dividend income and lowers one's home bias. Love it!

I like to buy and hold and hold and hold. I have held my BMO stock so long it is close to doubling in value. My BMO investment is yielding about 9.75% a year in dividend income calculated on the original investment value.

But, I am learning there is a time to sell. When a stock price gets inflated, dump it. Move on. When the price comes down, consider buying back in. I sold some Nutrien when it was in the $145 range but for the most part, I held on while the stock slipped all the way to $76. By the time I sold, NTR may have hit bottom and it might have been a better time for buying than selling. If NTR gets low enough to raise the dividend yield to 4%, I will buy a little for diversity while maintaining income.

And those are my thoughts for the day. Oh, and have a very merry Christmas. Cheers!

Diversification in a retirement portfolio

I believed in diversification long before I had even heard the term. Owning more than just one or two stocks just intuitively seemed right, to me. And despite what you may have heard or read, building a diversified portfolio of about 25 individual investments is not difficult. In fact, capping your portfolio at no more than 25 investments can be difficult. 

Owning more than one or two stocks, spreads out risk. Owning more than 30 stocks risks diluting your portfolio with second string investments. It is easier to build a solid, successful 20 stock portfolio than one crammed with 40 investments. Less is more when it comes to portfolio building. 

 

There are three risks that immediately spring to mind when one is investing in the stock market: market risk, firm-specific risk, sector risk. Market risk cannot be avoided. The market goes up and the market comes down but, it goes up twice as often as it falls. Market risk fades with the passing of time. Given enough time the market will always graph as an uphill slope.

Firm-specific risk refers to the uncertainty of making money on any given stock. Try as you might, firm-specific risk is always with you. Think of Nortel. You do recall Nortel, don't you? It was said to be "too big to fail." It failed.

Lastly, sector risk applies to all the stocks trading in one sector. For instance, AltaGas, Enbridge, Pembina, and TC Energy are all pipelines. If sentiment turns against pipelines, it turns against all the companies in the sector. Recently, telecoms ran into a rough patch that affected all the players in that sector. BCE, Cogeco, Quebecor, Rogers and Telus all dropped in value. Some dropped more than others but they were all affected.

Increase the number of stocks in a portfolio, increase the number of sectors in which one is invested, even throw in an ETF or two or three into the mix, and one has cut both firm-specific risk and sector risk. If you are Canadian with most investment in the TSX, buy an ETF based on the U.S. market, like XUS, and you have reduced market risk as well.

How many individual investments should you own? Well, it depends a lot on who one asks. Some claim  as many as 30 stocks are required for proper diversification. Others say owning 12 to 18 stocks in adequate.

I believe a good rule of thumb is to own at least 20 individual investments, up to a maximum of 25, with no more than five percent of a portfolio dedicated to any one stock. Note, I said stock. ETFs are different. It is easy to have 15% of a portfolio in an Index ETF based on the U.S. S&P 500 like XUS. Buy XUS and you immediately have a well diversified investment made up of 500 U.S. large cap companies. ETFs by their very nature are risk-diluting through diversification.

A spreadsheet is an excellent way to track one's portfolio. I know TD WebBroker will allow one to download a spreadsheet of one's investments. I imagine most other brokerage houses have similar software available to those with self-directed accounts.

A downloaded spreadsheet is incredibly malleable. One can easily track the percentage of a portfolio that is invested in each individual stock. And one can group stocks together and calculate how much of a portfolio in invested in each sector.

If you have more than one portfolio, download each and then link all to one master spreadsheet.

A well diversified portfolio should deliver good returns with less risk. A good spreadsheet will tell you how closely you are adhering to your diversification plan.

Telus has been a winner for me

I like Telus. It has been good to me. I held Telus when it split and took that as an opportunity to sell half my Telus holdings.

Recently, Telus has peaked my interest as it, and the rest of the Canadian telecoms, have been emerging from a long downward spiral. 

For instance, Telus dipped to a low of $21.60 in the past year. Sadly, I didn't add to my Telus holdings at the time.

Recently, I noticed it had recovered to $23.90. I took the bait and added almost two thousand shares to my Telus holdings. It has continued to climb since my purchase and today it is at $25.795. I am up $3600.50 on that buy.

Tomorrow is the ex-date for Telus and Monday is the date of record. Will I be reducing my Telus holdings? Yes but not immediately. Morningstar is rating Telus a 5-Star stock and that means it has more room to run. I will hold until Telus has lost at least one star and possibly two.

But, at some point, I will be reducing my holdings. I do not feel comfortable holding more than four or five percent of my retirement portfolio in any one telecom. Four percent is the goal. One must have goals.

Dividend Capturing: a first look at this strategy

Let's start by immediately admitting that the dividend capture strategy when strictly applied does not work. Period. If it did, everyone would be doing it constantly. It doesn't and everyone isn't. With that out of the way, let's see how my kick-at-the-dividend-capture-can played out.

I decided to buy a solid dividend-paying stock a few days prior to the ex-dividend date. Sticking strictly to the rules of the strategy, one buys the stock in question on the day before the stock's ex-date. I prefer buying two days, or a little more, prior to the ex-date.

The goal is to be a shareholder on the ex-date. This guarantees one is a shareholder of record on the record date, which is often the day after the ex-date. At this point, as a shareholder of record, you have captured the dividend. The dividend is yours. Period.

Key terms to understand:

Declaration Date

This is the date a company announces it is paying a dividend. The declaration statement includes details such as the value of dividend, the record date and the payment date.

Ex-Dividend Date (or Ex-Date)

In order to receive the next scheduled dividend, you must own the stock before this date. If the stock is purchased on or after the ex-dividend date, the buyer will NOT receive the upcoming dividend. The day before the ex-date is said to be the last day one can buy a stock and still be eligible for the coming dividend. I have been told buying the stock in question two days before the ex-date adds a margin of safety.

Record Date (or Date of Record)

By the end of the business day on the record date, you must be on the company's books as a shareholder of record to receive the dividend. The record date is usually the first business day after the ex-dividend date.

Payment Date

This is the scheduled date on which a company will pay a declared dividend to shareholders of record.

Recently, I tried this strategy with Telus (T). Why Telus? Well, today Telus is boasting a five star rating from Morningstar. Other sources rate Telus a "Strong Buy". If I cannot sell the Telus stock quickly for a fast profit, I can hold it and not lose sleep. One could do a lot worse than holding Telus. In fact, I am already a holder of Telus.

How I played the dividend capture strategy with my recent Telus purchase:

• Thursday, November 30: I bought 1900 shares of Telus at $23.90 for a total of $45,419.99.
• Friday, December 8, 2023: ex-dividend date. I was a shareholder.
  
• Monday, December 11, 2023: I was a shareholder of record date. Shares were selling for $24.87.
  
• Tuesday, December 12, 2023: Shares selling for $24.65. I could sell for $46,825.01. I'm holding.
• Wed, December 13, 2023: I could have sold 1900 shares of Telus at $24.94 for a total of $47,376.01 and $1956.02 profit thus far.
  
• Tuesday, January 2, 2023: I will collect a $714.40 dividend payment
  

Total profit for this play could have been $2,670.42. The way this really played out is much different. I figured Telus would continue to climb in price. It didn't. I held and Telus dropped below the price I had originally paid. By December 15th, I was in the red. I should have stuck with the original dividend capture strategy. Oh well . . . I will collect a very nice 6% plus dividend while I wait for the stock to recover and it will.

The table below shows the key dates:

Type	Declaration Date	Ex-Dividend Date	Record Date	Payment Date
Date	November 3	December 8 (Friday)	December 11 (Monday)	January 2, 2024
Note	A dividend of .3761 is announced.	One must own Telus shares before this date to be entitled to the dividend.	At the close of business on this date, one must be on the Telus books as a shareholder in order to receive the dividend.	The date the dividend is paid to shareholders.

Time is the secret to successful investing

The Toronto market is down today. It's not as far down as it has been in recent months but it is down. I am not concerned. A lot of the stock that I own today was purchased some two decades ago. Some of these old holds have to be off their highs by 50% or more before I begin to see red.

The gain at the top of the column on the left represents one of these old holds. It has delivered a steady stream of dividends for decades. I have taken out more money in annual dividend payments than I invested in the stock originally. And, as it has gained in value with the passing years, I have more money in it today than I did at its purchase. Stocks like this form a bulwark against an old, seasoned portfolio falling into the red.

The two stocks at the bottom are recent additions to my portfolio. The second from the bottom was added when the stock, a pipeline, got so cheap I could not resist buying it. With a dividend greater than seven percent, this stock is a gem.

The bottom stock is one that I bought just days ago. I am playing with the dividend capture strategy for an upcoming post. My gut feeling is that this strategy doesn't work. If it did, everyone would be doing it and everyone isn't.

The ex-date for this stock is this Friday and last Friday it looked to be a stock on the upswing. And not only was it gaining value but its entire group, in this case telecoms, was in recovery mode. With all the relevant boxes checked, I bought a few hundred shares.

What lessons do I take from the above? Lots of time spent holding a stock that is slowly climbing in value is time well spent. And although it is next to impossible to time the market, being lucky and buying a stock at the right time is a huge bonus. When you manage to time the market, admittedly after the fact, smile and go with the flow. You may have a gem worth holding for years.

Never forget: compounding is your friend. And time is the friend of compounding.

$1 Million Retirement Portfolio Demo as of Dec. 1, 2023

It is December and my crack at designing a retirement portfolio for a retiree with a million dollars in savings has climbed above the million dollar mark. In other words, the portfolio, opened in late June, is now back to the value it had when opened. 

On the bright side, starting in August, I am withdrawing $3,333.33 at the first of each month. December's withdrawal brings the total withdrawn to $16,666.65. No matter the value of the portfolio, I am deducting the full $3,333.33 each month as this amount is covered by dividend income.

Today, the cash balance in the portfolio is $2,355.74. Clearly, I  am in good shape to start the new year. I only need to collect a little less than a thousand dollars in dividends in the coming month to make my January payment. I will check the official inflation rate for 2023 and I will increase the monthly payment by that percentage.

I will also be opening a TFSA to receive the in-kind stock withdrawal I must make come January. My imaginary retiree is 65 and so is his wife. I will be withdrawing in-kind the mandatory 4% of the opening value of the RIF and transferring that stock to the TFSA. To meet my monthly withdrawal demands, I may have to withdraw funds from both the RIF and the TFSA. We will see.