Forecasting Stock Gains in Retirement

Do you wonder what your stocks will be worth in ten years? I do. 

First, let's admit that foretelling the future is a mug's game. That said, calculating a reasonable future value for a stock and a reasonable dividend yield can be illuminating. When the calculated numbers are not as expected but much lower, such numbers can be considered a red flag, a warning, and it may be time to rethink one's plans.

Let's say a retiree owns 500 shares of Royal Bank. He/she spends the dividends as they are received in order to live. As for the stock itself, it is held indefinitely so as not to kill the goose that laid the golden egg.

I am very much like the retiree described above. Removing all the dividends to pay the bills made me wonder if I am draining my portfolio. I was worried when I started down this path. Now, 14 years later, I am not so concerned. My retirement portfolio, despite the withdrawals, has more than doubled in value.

• What could Royal Bank stock be worth in ten years?
• What would be a reasonable guess for the Royal Bank dividend payment ten years from now?

To answer these questions, go to TipRanks dashboard and click on Research Tools at the top of the page. Under Dividend Investing click on Dividend Calculator.

Today 500 Royal Bank shares have a dividend yield of about $1930 annually. In a decade, according to the calculator, an annual dividend income of about $5260 is possible. After all, the Royal Bank has a history of regularly raising its dividend. The calculator is simply using past increases to predict future ones.

Personally, I'd like to suggest that the Royal Bank has historically paid a dividend of about four percent. If the stock is worth $132,500 in a decade, then a four percent yield would yield about $5300. My forecast is lower than the calculator's but it is still a good income.

There is one thing we do know for certain, the past will not be repeated -- at least not perfectly. But, our calculations clearly indicate a good outcome is not just possible but to be expected. That's good enough for me.

Building a retirement portfolio is easy

When I retired I put my savings into the stock market. I discovered putting together a retirement portfolio in neither difficult nor all that risky. This is a classic buy and hold portfolio that rides out bear markets with grace.

The first stocks I purchased were bank stocks. The Royal is Canada's largest bank. Today it is paying  dividend of $5.28 for a yield of 4%. TD and the Bank of Montreal are two other must-haves when it comes to Canadian banks. TD pays a dividend of $3.84 for a dividend yield of 4.4%. BMO is paying $5.72 for a yield of 4.5%.

• BMO - 4.5% dividend yield
• CM - 6% dividend yield
• RY - 4% dividend yield
• TD - 4.4% dividend yield

One Canadian bank down on its luck is CIBC. Its depressed share price translates into a 6% dividend yield from a dividend of $3.40. Hold these four banks and you have checked off the financial holdings in your portfolio. Note: These Canadian banks are famous for not cutting their dividends. Invest $60,000 divided equally among these four bank stocks and you can count on about $2835 annually in dividend income.

Next, I would turn to the utilities sector and put about 15% of my retirement savings in a mix of Emera, Fortis, Hydro and possibly a little in Alta Gas. I think of Alta Gas as more of a utility than a pipeline.

• Emera - 5.3% dividend yield
  
• Fortis - 4.1% dividend yield
  
• Hydro - 3% dividend yield
• Alta Gas - 6% dividend yield

Put $30,000 into these four utility stocks, 4% in all but Hydro, which get 3%, and you can count on about $1410 annually in dividend income.

Pipelines are another solid investment paying fine dividends. All retirees have money invested in pipelines even if they do not know it. The Canadian Pension Fund, CPP, has a large exposure to pipelines. Buy Enbridge (ENB), TC Energy (TRP) and Pembina (PPL) and you have three good, solid companies. Note the generous dividends. There is a good reason the CPP likes pipelines: the dividends.

• Enbridge - 6.5% dividend yield
• Pembina - 5.7% dividend yield
• TC Energy - 6.6% dividend yield

Put $30,000 divided equally among these three pipeline stocks and you can count on about $1880 annually in dividend income.

This brings us to telecoms. One simply must have exposure to this segment of the market and there are lots of good companies in which to park some retirement money. Think Bell, Cogeco, Quebecor and Telus. 

• Bell - 6% dividend yield
• Cogeco - 4.4% dividend yield
• Quebecor - 3.8% dividend yield
• Telus - 5.2% dividend yield

Divide $40,000 equally among these four telecom stocks and you can count on about $1940 annually in dividend income.

With only a $160,000 invested, our retirement income portfolio is already generating more than $8000 a year. It is a rare retired couple who have not saved at least $160,000 toward their retirement. The present portfolio contains fifteen different companies. This is approaching what many claim is the ideal number of investments for a small portfolio. 

If our retirees have a bit more to invest, it is time to consider putting a little into the American market. It is, after all, the biggest game in the world. A couple of American-based ETFs does not seem unreasonable. I'd put $40,000 into the States with 66% in ZWA, the BMO Covered Call Dow Jones Industrial Average Hedged to Cdn. Funds ETF, and 34% in XUS, the iShares Core S&P 500 Index ETF. (The ZWA is here for the dividend. Seniors need income. If you do not need the income, put more into XUS.)

• XUS - 1.4% dividend yield 
• ZWA - 6% dividend yield

Invest $40,000 divided as detailed in these two ETFs and it should generate about $1775.

Not having anything invested outside North America would be seen by some as a basic error in building a properly diversified portfolio. I am not one of these folk but if you are I would think of adding an ETF like VIDY to the mix. A Vanguard ETF, VIDY has a very low MER and pays a nice dividend of 4.35%.

If I had $25,000 I'd add some VIDY and increase my income by $1085 annually.

• VIDY - 4.35% dividend yield

At this point, I just might call it quits. I could add some health care but the stuff I would buy does not deliver the dividend income I need in retirement. And what do I like in health care? Think TDOC and XHC.

Every portfolio I have ever had contained something that was there just for fun, to provide some excitement. I wouldn't add a lot of the following but I would be comfortable putting $25,000 in my portfolio split evenly between BN, Brookfield Corporation, and BAM, Brookfield Asset Management.

• BAM - 3% (estimated) dividend yield
• BN - 1.4% dividend yield

Brookfield is a fine holding in any portfolio. BAM, a recent spin-off, promises to pay a good, if not great, dividend. BN has a posted dividend yield of 1.4%. My hope is that the Brookfield investment will deliver excellent capital gains along with a fair dividend to pay one for holding the stocks.

There, we are done. A quarter of a million invested and an income of approximately $11,400. That's close to a thousand dollars a month. This portfolio delivers the almost mythical four percent without breaking a sweat. 

If one does not already have a TFSA, tax free savings account, I'd get one. Putting as much of this investment as possible into a TFSA makes a lot of sense. Avoiding some taxes makes a dividend income in retirement go farther.

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).