Advice for a retiring friend and nephew

My job had a very poor pension plan. If I relied on my company pension in retirement, I couldn't pay my bills. But my wife and I live well. How? Dividend investing. Each year we earn as much or more from our stock portfolio than we do from my company pension plus our CPP and OAS payments combined. For this reason, I am a big booster of investing in stocks in retirement.

With any luck, one will be retired for a long time. So, don't be cheap with your time. Put some time aside for research. To get you started, here are a couple of Webinars I believe a retiree should watch. Log-on to WebBroker and click on Learn -- Webinars -- Past Events. Watch: Five Stock Dividend Portfolio and Defensive Dividend Income for Retirement.

(After posting the above, I found Five Stock Dividend Portfolio on YouTube.)

One caveat: five stocks is a bare minimum. It can be done but why? Why buy one Canadian bank when you could buy two or three? Adding diversity while maintaining quality is always a good move.

Last June I decided to test my retirement theories. I created an imaginary retirement portfolio with an initial value of $1 million dollars. It can been seen here: Retirement Portfolio.

Today, that portfolio is worth $999,619.09. In January, I withdrew the minimum amount as an inkind withdrawal. In accordance with RRIF rules, these stocks were transferred to a newly opened TFSA now worth $42,397.06.

To sum up, my imaginary $1 million retirement portfolio is now worth $1,042,016.15. Later today, after making my monthly $3,470 withdrawal, I will have withdrawn a total of $27,076.65 to cover living expenses in retirement. I think I can claim success for my approach at the moment.

A retiree could choose to buy an annuity rather than buy stock. They could, I wouldn't and didn't, but it is done. On the plus side, an annuity locks in annual payments. On the minus side, the locked in annual payments stays the same for the life of the annuity. A locked in payment loses a lot of buying power over the years. I have an annuity-based pension paying $6273.72 annually. To deliver the same buying power today as it did when opened in 2009. it would have to be paying $8790.

How do insurance companies raise the money to make annuity payments? The insurance companies invest in stocks, bonds and cash funds for one thing. I like to think I simply cut out the middleman. Unlike my annuity payment, my portfolio payment has grown with the passing years and thus far my imaginary portfolio is doing the same.

A good source for insights into Investing

TD WebBroker offers classes on investing. Before signing up for a class, you might benefit from having enough investment smarts to be able to ask knowledgeable questions. I have found a great source of investing info is Investopedia.

Recently, I bought a little B2 Gold Corp stock. I made my decision to buy based partially on stuff I had learned reading Investopedia. There are reasons why one stock is a buy and another is not. What are those reasons? Read Investopedia for the answer.

Click the following link: The 4 Basic Elements of Stock Value. After that, check out this one: 4 Ratios to Evaluate Dividend Stocks. Investopedia is amazingly complete. If you like video instruction, Investopedia has that as well.

I like B2 Gold Corp. (BTO)

Little bells start ringing when I decide a stock may be a buy. The first bell is the stock price. If it is off its high for the past year by 20% or more, it is in bear market territory. If it's alone in its descent, this is worrisome. But, if the entire market is down as well, we may well have a buying low moment.

Recently, B2 Gold Corp caught my attention. It was off its high for the year by 38%. Was B2 Gold in trouble or was the stock undervalued?

For an answer, check the P/B ratio. If it less than 1.0, the stock may be undervalued. B2 Gold had a P/B value of 0.9. A promising number.

As a dividend investor, before going farther, I check the dividend. I require a dividend of at least 4% and ideally with a payout ration below 80%. The lower the payout ratio the better. The payout ratio indicates the percentage of a company's earnings, or in some cases cash flow, that is being devoted to dividends. B2 Gold has a 6% dividend with a payout ratio of 68%. All good.

Keep in mind, bear markets drive yields higher. A two dollar dividend on a hundred dollar stock yields 2%. If the stock price falls by half to $50, the two dollar dividend now yields 4%. This is yet another reason to buy low.

Moving on, it is time to check the ROE or return on equity. The higher the ROE the better. To get a handle on what high actually means, check the ROEs of comparable companies in the same industry or sector. The ROE is more than just a measure of profitability, it is a measure of a company's efficiency at pumping out profits. According to TD WebBroker, the B2 Gold ROE leads the pack. Read what WebBroker had to say:

TD WebBroker has a section on Profitablility under Function. The BTO numbers look excellent. See for yourself, the numbers are reproduced below:

If a company isn't profitable you probably do not want to buy its stock but a profitable company may still have stock selling from the bargain bin. More and more this appears to be the case when it comes to B2 Gold. Let's continue our investigation.

The P/E Ratio (TTM), TTM being the trailing price-to-earnings ratio, is another indicator of whether a stock is expensive or cheap. A low P/E (TTM) ratio suggests the stock is undervalued. B2 Gold has P/E (TTM) of 10.8. This is low.

Another clue indicating a company is undervalued is the P/CF or price to cash flow ratio. This ratio compares a company's share price to its operating cash flow. It is calculated by dividing the market capitalization by the operating cash flow of the company or on a per-share basis by dividing the share price by the operating cash flow per share. The lower the P/CF ratio the better. A number below 10 indicates the stock may be undervalued. 

The P/CF ratio is seen as a better investment valuation indicator than the P/E ratio because it provides a less distorted picture of a company's value, especially for companies with large non-cash expenses. B2 Gold has a P/CF of 4.7, well below 10. Again, good!

B2 Gold is getting ready to open a new gold mine in Nunavut come 2025. That's good. At the present time B2 Gold has a large mine in Mali among others. The Russians are showing interest in Mali and its gold. That's bad. I decided to buy B2 Gold. I picked up some shares for about $3.60. The dice are thrown. Will I have a winner?

Buying B2 Gold Corp adds excitement to life

I cannot afford to gamble but I enjoy it. At least, I enjoy gambling when there is some chance of winning. The better the chance, the more the fun. For that reason, I rarely buy lottery tickets. The odds are terrible.

The other day the market price for Canadian gold producer B2 Gold Corp dropped below its Exponencial Moving Average, its Bollinger Bands and its Moving Average Envelope. The stock has dropped from a high of $5.87 to a price of $3.56. That's a fall of almost 40%. This puts B2 Gold deep in bear market territory. With a solid dividend of 5.9% today, I saw a potential buy.

How do others see B2 Gold? It is on the TD Action Buy List this month. The analysts followed by TD Webbroker rate it a Strong Buy and I like the fact that in early 2025 B2 Gold is bringing a new mine online in Canada's far north, in Nunuvut. I see a mine in Canada as located in more politically stable region than a mine in Mali where B2 has a large mine today.

The TD analysts have set an average target price for B2 Gold at $6.30. That is a gain of more than 75% over its market price today.

I see a buy. I like to invest up to 1% of my portfolio in "flings". B2 Gold looks like a "fling". I picked up some shares at $3.64 and I hope to make almost 6% on my investment, that's the dividend, while I wait for the price to pop. One gets a lot of stock when the entry price is so very low. If it jumps even $2, it is windfall.

If the Mali story doesn't deteriorate, I may have a winner.

The Next Move is to Diversify

A few days after making my in-kind withdrawal from my imaginary retirement portfolio, I had transferred some shares of Canadian Utilities from the imaginary RRIF to the imaginary TFSA. Holding only one stock, the CU shares, in my TFSA made me uncomfortable. There were a couple of stocks I wanted to hold and so today I diversified.

The TFSA now holds 309 shares of Canadian Utilities (CU), 820 shares of Telus (T) and 160 shares of TD Bank (TD). A further perk is that the value of the TFSA has increased by about $400. I will keep you posted as to changes at the first of each month.

Telus is a five-star stock by Morningstar's calculation. I will sell the Telus when the price rises. Remember, I also hold Telus in the RRIF account. I see holding Telus as a winning move. It pays a good dividend while one waits for the capital gain.

Buying the TD today will capture the quarterly dividend. Nice. And the TD stock should climb in the coming months and climb more than the CU stock I was holding. Eventually I may actually gravitate back to holding more CU. Remember, I am treating my RRIF and my TFSA as essentially one large portfolio. I do not want to be underweight in my CU holdings indefinitely.

Just to keep everyone up-to-date, the RRIF plus the TFSA is worth $1,055, 642.30 as of market close today. Not bad for a portfoliio opened with one million dollars in June. That means it is only seven months ago.

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!