Keep the fees for managing your long term savings low

Long term savings is about setting aside dollars today so you can spend them later.  Therefore, the strategy calls for “lending” your savings (capital) to others who need it and reaping “rent” on those dollars until they are returned to you.

Depending on your savings vehicle, the “rent” is called interest (bonds, term deposits and GIC), it’s called dividend for stocks and capital gains (or loss) for the sale of stocks and bonds.  On top of the “rent” are the systematic fees that reduce this amount.  In other words, all the advice we receive and systems we must use cost money… that is investment fees.  Unfortunately, these fees are often hidden but definitely take a bite out of the “rent” we receive.  These fees whether hidden or not can be quite expensive.  Therefore, our savings mantra should be:

Lower the fees… keep more of the rent money

My lowest savings fees are in my accounts with Questrade.  When I buy or sell stocks there, the commission I pay is a penny a share, minimum $4.95 and maximum $9.95.  Afterwards, Questrade deposits my dividends in my accounts… at no additional fees.

At the other end of the “rent” paid by borrowers, banks offer a 5 year GIC that pays 2.75% (while they lend out the same money at 6%)… quite a lot of hidden fees in there.  The cheapest on line bank offers   the same 5 year GIC at 3.05%!

I do not have GICs or term deposits in my long term savings.  Obviously, I do own some banks.

With mutual funds, management fees go up to 2.75% a year.  Imagine that your mutual fund owns stocks that pay out 3% in dividends, it’s just enough to pay the management fee…  Fortunately, we have Exchange traded funds (ETF) which operate more efficiciently, at lower costs… thus lower fees.

I sold my last mutual funds and ETFs in 2005.

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I do not put a lot of energy in selecting stocks.  In my experience, it’s more important to have disciplined funds allocation and disciplined stock diversification and allocation according to the S&P 500 economic sector weights.  Thus, I aim to own 2 Canadian and 2 American stocks in each of the 11 economic sectors that make up the S&P 500 index.

Thus, in April, I sold my Oracle (ORCL-Q) holding and replaced it with the Canadian Open text (OTEX-T).  Now I own 2 Canadian tech companies – Tecsys (TCS-T) and Open text and 2 US tech companies  – ADP (ADP-Q) and Microsoft (MSFT-Q).

While on the subject of technology companies, I sold some Tecsys in April as its price was climbing too high.  My stock allocation indicated that I redeploy the cash proceeds into the financial sector.  I therefore added to my Canadian Western Bank (CWB-T) position.

I also finally found a Canadian health care stock I can live with.  Toronto based Medical Facilities Corp. operates surgical facilities in the US.  The dividend yield is 6.86%.  It’s interesting that as a Canadian company, its dividend is “eligible” for the Canadian dividend tax credit.

Until next month,

March dividend harvest

During the month of March I harvested $4600 in Canadian dividends and $1475 in US dividends.  With these sums, I rebalanced my portfolio as the value of my stocks in the technology sector had increased more than 5% of my sector allocation target.  Therefore, I sold some shares of Oracle (ORCL-Q), Tecsys (TCS-T) and ADP (ADP-Q).  I added to my positions in the basic consumption sector with North West Company (NWC-T) and Transcontinental (TCL.A-T) and in the healthcare sector with Becton Dickenson (BDX-N)

My dividend harvest continues to increase from year to year.  My goal is to harvest dividends that increase at a rate greater than the 2 -3% annual inflation rates.  With increasing dividend revenue, I am more comfortable budgeting my expenses during retirement knowing that I can easily offset inflation’s impact on ever lower purchasing power.

Well since January 1st, here is a list of my stocks that have increased their dividend payout as well as the rate of increase:

Dollarama            10%

Oracle                   26.3%

NWC                      3.1%

Realty Income   2% + .2%

Stantec                 5.5%

TD                           10.4%

Magna                  10.6%

Suncor                  16.7%

3M                         5.9%

AFLAC                   3.8%

ABBVie                 11.5%

 

This list represents 11 of the 44 stocks that I own.

Remember, these stocks are not recommendations… enjoy finding your own stocks!

Click here to check out this site for other companies that have raised their dividends.

Until next month!

Stocks are climbing again!

At the start of February, I withdrew about $24,000 worth of stocks from my RRSP account; these stocks are unloved these days.  The stocks were down between 25 to 30% from their September high.  At withdrawal, Questrade withheld $8000 in income tax for our governments.  I then immediately bought the same stocks in my margin account at Interactive Brokers.  To make up for the income tax amount withheld by Questrade, I borrowed the amount on my margin account at the current interest rate of  2.563% per annum.

These days, it seems like stock markets are back climbing again.  Therefore, it looks like my RRSP withdrawals are over for now.  Looking back over the last two months of RRSP withdrawals, I have sold stocks and withdrawn $ 104,000 from my RRSP account.  At the September high last year, these stocks had a value of $156,000.  I will add this $104,000 withdrawal to my 2019 income tax return.  Some of these dollars will be taxed at 53% but given the market correction, I figure that I am only paying at most 33% income tax since the withdrawal only represents 66% of the market high value ($104,000 / $156,000).  Questrade has already withheld $31,200 in income tax.  I will pay the income tax balance owing to governments at the end of April 2020.

Readers… I suggest you too keep an eye on your unloved stocks in your RRSP account… especially Canadian ones.  If you want to keep these stocks « forever » and their prices are down more than 25%… you have a rare opportunity to withdraw these at a much lower tax “hit” and position them in a margin account to generate income at a much lower tax rate in the future.

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February dividend harvest is usually thin… this year … no different.  With some US funds in my margin account, I bought 1 share of Berkshire Hathaway (BRK.B-N).  I now have 73.  Since this US stock does not pay dividends, I like to keep it outside of my RRSP as I can only benefit from its price increase over the years to come.  Thus, it can only generate capital gains of which only 50% is taxable.  When I keep it in my TFSA account… well, the income is tax free!

Note that brokers withhold 15% of dividends paid out by US companies and our governments tax these « foreign » dividends at the same tax rate as interest or salary… but, we do get a credit for the amount of taxes withheld.  This withholding tax does not apply to US stocks in a RRSP account.  Still… I prefer non dividend paying US stocks outside my RRSP.

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This month, in my margin account, I expect to receive $3600 in Canadian dividends and $761 in US dividends.  In my RRSP account, I expect to receive $216 in Canadian dividends and $965 in US dividends.  Therefore, I will put this cash to work in April buying stocks… hopefully in a down market!  Note that my fixed income investments are mostly preferred shares that I hold in my margin account.  That explains the large amount of dividends I receive in that account.

In my TFSA account, I average $218 in dividends per month.  Note that with the stocks I pulled out of my RRSP account, I now have about $130,000 of stocks I will transfer into my TFSA account in the years to come to shelter their income from income tax.

Talk to you next month,

First RRSP surgery is completed!

In early January, I completed the withdrawal of 10 stocks from my RRSP account.  I directed 9 of these stocks to my margin account with Interactive Brokers.  The 10th stock, a REIT, was directed to my TFSA at Questrade.

With the stock market correction in December, I sold 10 stocks in my RRSP account that experienced serious drops in price in 2018.  The proceeds amounted to $78,400.  At the market top in September, these stocks were worth $119,599.  Therefore, these stocks were down 35% from their price tops.

Note that on this withdrawal, the broker retained 30% of the amount as a withholding income tax for the governments.  The withholding tax amounted to $23,505.

When I purchased these same stocks in my margin account, I borrowed the amount withheld for taxes.  Presently, Interactive Brokers charges 3.107% in annual interest on Canadian dollar loans.  Questrade transferred the rest of the withdrawn funds to my margin account.

Note that I have no intention of getting rid of these stocks.  I want to continue collecting the increasing dividends these stocks pay quarterly.

With the large RRSP withdrawal, my taxable income will be much greater this year.  Thus, this year, the Canadian dividends I receive from these transferred stocks will be taxed at 35%… but in the following years, the tax rate will be closer to 17.5%!

Pleasant surprise, after I purchased the stocks in my margin account, most of the stocks profited from the increasing stock market in January.  Only half of these theoretical capital gains will be taxed from now on!

So here is what 2019 looks like to me:

  • I will pay about $730 in interest on my margin loan – this interest is tax deductible at the regular rate
  • I will receive $1669 in Canadian dividends – taxed at the lower rate
  • I will receive $1631 in US dividends – taxed at the regular rate less the US withholding tax
  • I will receive $290 in distributions from my REIT in my TFSA… tax free

With these 9 stocks now outside my RRSP account, I will transfer these into my TFSA over the next years according to the annual limit.  Therefore, the dividends these stocks pay will become tax free.

This month, I will withdraw another $26,412 worth of stocks that I will repurchase in my margin account…

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My fund and stock allocations indicate that the value of my Canadian stocks in the base consumption sector is the most below the target.  Therefore, I used my January dividends in my RRSP account to buy, for the first time, shares of Alimentation Couche Tard (ATD.A-T).  After all, I usually purchase my gasoline at its stations; so I decided to put the profit on my purchases back in my wallet!

For my $6000 contribution my TFSA, I forgot to transfer my newly, outside my RRSP account stocks…  Instead I bought the Brookfield Renewable Resources (BEP.UN-T) units I withdrew in my RRSP withdrawal.  I put this holding in my TFSA as its distributions are fully taxed, unlike Canadian dividends.

Until next month

RRSP surgery begins… now!

Over the last 2 years I’ve been preparing the withdrawal of funds from my RRSP account.  I have $545,000 of stocks to pull out.  I realized 2 years ago that putting Canadian stocks in a RRSP is not a good idea since my marginal tax rate at withdrawal is not less than the marginal tax rate in the years I contributed.  As I withdraw funds from my RRSP, I pay income tax at the same rate as if the funds were salary or interest revenue.

Note that the largest income tax bracket (in Quebec) is 37.12%.  If your Taxable income is between $46,605 and $86,105, this is the tax rate you pay on the $39,500 of this bracket.   In my case, my taxable income over the years has never been higher that the bracket limit.  Therefore, all my RRSP contributions that have generated dividends and capital gains will be withdrawn at the same marginal tax rate at which I contributed.  Not the premise of holding a RRSP…

During my RRSP contributing years, I always assumed that my marginal tax rate would be lower during my withdrawal years.  Well, it’s not going to happen as my investments already generate $45,000 of dividends annually.  This figure will only increase over the years.

Since you read this blog, you may also end up in the same situation as me.  Therefore, ask yourself, “Will I really be in a lower tax bracket at retirement?”  If the answer is “no”, be very careful if you consider putting Canadian stocks (and non-dividend paying US stocks) inside your RRSP.  It might be best to hold them in a cash, margin or TFSA account.

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So, I now begin my RRSP surgery by withdrawing RRSP funds while the stock market is down.  Specifically, the surgery involves:

  • Selling stocks that have decreased by more than 26% in 2018 (about $82,000 of stocks)
  • Withdrawing the funds (brokers holds back 30% for income tax – $24,600)
  • Depositing the funds in my margin account with Interactive Brokers
  • In addition to my deposit, borrowing on margin the amount of withholding tax
  • Buying the same stocks that I held in my RRSP account

Note that:

  • Borrowing on margin is not for everyone
  • Interactive Broker currently charges 2.762% annual interest on its margin loan
  • The margin interest is deductible for income tax purpose
  • I want to hold the same stocks
  • Canadian stock dividends benefit form the dividend tax credit
  • Capital gains and losses are included at 50% for income tax purpose

The big plus in my mind is that I get to take “unloved” stocks out of my RRSP (Dollarama is down 40% in 2018) and pay less income tax (40% less for the Dollarama withdrawal).

If the market correction continues in January, I will prepare a list of “unloved” stocks to pull out of my RRSP in February, if their prices are down enough.

Until next month,

Interest rates on the rise… or not!

In opposite direction to interest rates, fixed income investments have been going down in price.  In my portfolio, my fixed income allocation is filled with preferred shares.  During November, the decrease in price has been noticeable.  So much so that my Allocation of funds indicated that it was time to sell off some common shares to move over to fixed income and buy additional preferred shares.

Also typically moving in opposite direction to increasing interest rates are another result of changing interest rates is the changing price of interest sensitive stocks such as Real estate (REIT) and Utilities.  These two sector’s impressive growth in November seems to indicate that the markets believe interest rate increases are over.  Nonetheless, my stock allocation indicated that these two sectors were overweight.  Therefore, I did some “pruning” by selling some shares.  Interesting note, stocks in these two sectors were having a bad 2018.

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In November, three sectors spiked up in price.  Therefore, I sold some of the following stocks :

  • American State Water (AWR-N) – Utilities
  • RIO CAN (REI.UN-TO) – Real estate
  • Johnson & Johnson (JNJ-N) – Health

With the sale proceeds and the monthly dividends I added to these not so popular stocks :

  • AFLAC (AFL-N) – Finance
  • Canadian Western Bank (CWB-T) – Finance
  • Dollarama (DOL-T) – Basic consumption
  • Helmerich & Payne (HP-N) – Energy
  • Oracle (ORCL-Q) – Technology
  • Tecsys (TCS-T) – Technology

Please note that these stocks are not recommendations.  Stock picking is very personal.  So please have fun selecting your own “businesses”.

Until next month,

And the sale goes on!

Wow… stock markets where on sale in October!  Will the sale continue in November?  We will see…

This stock market decline highlights the difference between « traders » and long term savers.  This decline in the market scares “traders” as they usually borrow money to buy and sell shares in a rising market.  Of course, when the market has down days, day after day, traders sell at any cost.

On the other hand, long term savers like you and I appreciate the opportunity to buy additional shares at lower prices.

It is important to keep in mind that stock markets are not very precise at determining business value in the short term.  For a while shares are way overvalued and then they are way undervalued.   That is why as a long-term investor, it is important to not pay attention to this “noise” and just continue on following a savings plan that includes regularly buying shares using an objective decision tool.

Warren Buffet maintains that, “In the short term the market is a popularity contest; in the long term it is a weighing machine”.  Therefore, keep your focus on long term goals.

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In October, my Stock allocation for 2019 indicated that I had to sell some Procter & Gamble (PG-N) and buy other shares on sale:

AT&T (T-N), 3M (MMM-N), Transcontinental (TCL.A-T), McDonalds (MCD-N) and Lowes (LOW-N).

I added to my existing position of these stocks on days when they experienced significant drops in price.

My Stock allocation for 2019 also indicated that I should sell some shares of Helmerich & Payne (HP-N) at the beginning of the month and then buy them back at month end… 15% cheaper .

Until next month,