Baby Boomers: Can You Live on JUST Your OAS and CPP Pension?

Choosing between the Vermilion stock and the BMO stock to supplement your OAS and CPP pension depends on your risk appetite. The energy company offers higher dividend but the banking giant is the more dependable dividend-payer.

| More on:
edit Business accounting concept, Business man using calculator with computer laptop, budget and loan paper in office.

Image source: Getty Images

Retirement life is tough if you don’t have enough financial resources. Baby Boomers, the largest generation in history, should take note. In Canada, the Old Age Security (OAS) and the Canada Pension Plan (CPP) pension are becoming increasingly important because the number of senior citizens is growing.

In 2020, would-be retirees are looking at an average combined monthly payout of $1,286.40. The maximum OAS monthly benefit is $613.53, while the average CPP monthly payout is $672.87. With this amount, can you live on just the OAS and CPP pension?

If the amount appears inadequate to you, the most suitable remedy is to create another source of income. Investing in your Tax-Free Savings Account (TFSA) is the fastest way to create other income to supplement your OAS and CPP pension. More important, your future earnings are tax-free.

You can opt to invest in an energy stock Vermilion Energy (TSX:VET)(NYSE:VET) or a bank stock like Bank of Montreal (TSX:BMO)(NYSE:BMO) or BMO.

High-yield energy stock

Vermilion is popular among income investors because this $3 billion oil and gas E&P company is a generous dividend-payer. At present, this stock pays a mind-boggling 14.24% dividend. The earnings from a $108,400 investment ($15,436.16) can approximate the yearly payout of the OAS and CPP pension.

Since 2018, Vemilion has maintained this high yield, which is an incredible feat. However, the company has been feeling the pinch over the last couple of years. Some analysts are worried that a dividend cut is possible. If it happens, it would be a deep cut.

Vermilion could face a $205 million cash deficit in 2020. The company would lose financial flexibility. Similarly, the high debt level and lack of assets to sell could compound the problem.

In late January 2020, Vermilion’s CEO Anthony Marino said it is economically warranted for the company to pay a high yield. However, a dividend trap is a threat to would-be investors.

Dividend-pioneer

A safer bet for Baby Boomers is Bank of Montreal, although the dividend is only 29.24% of what Vermilion pays. Nonetheless, you’ll be investing the first Canadian company ever to pay dividends. The practice has been going on for the last 191 years.

The 4.19% yield is respectable given that BMO is a blue-chip company and the fourth-largest lender in Canada. A $100,000 investment can produce $4,190 in annual passive income. For the last two decades, the stock’s total return is 875.33%.

In its first-quarter 2020 earnings report, BMO’s capital-markets division saw a 39% surge ($356 million), which offset the 20% decline in the U.S. lending business.

There was also a 17% increase in underwriting and advisory fees and trading revenue. BMO credits the improving markets for the profit boost.

You’ll pay a higher premium for BMO ($94.23 per share) versus Vemilion’s $13.56 share price. Weigh your options before choosing between the two dividend stocks.

Comfortable retirement

People are living longer, and therefore, your savings or retirement fund should be able to stretch farther than before. Thus, Baby Boomers can live comfortably in retirement if there is income outside the OAS and CPP pension.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Christopher Liew has no position in any of the stocks mentioned.

More on Dividend Stocks

Two seniors float in a pool.
Dividend Stocks

TFSA: How to Earn $1,890 in Annual Tax-Free Income

Plunk these investments into your TFSA to earn passive income and avoid the taxman.

Read more »

Engineers walk through a facility.
Dividend Stocks

1 TSX Stock I Wouldn’t Touch With a 10-Foot Pole

AtkinsRéalis (TSX:ATRL) is one TSX stock I'd never invest in.

Read more »

edit Woman in skates works on laptop
Dividend Stocks

3 No-Brainer Stocks to Buy Under $30

These three stocks all offer a huge deal for investors looking for dividends, as well as growth that will last.

Read more »

You Should Know This
Dividend Stocks

How to Convert a $300 Monthly Investment Into $338 in Monthly Income

If you want a certain amount in monthly passive income, invest a similar amount today and leave the rest to…

Read more »

Increasing yield
Dividend Stocks

3 Income Stocks With Big Yields to Consider in April 2024

If you haven’t yet made your March investments, here are three income stocks to buy the dip and lock in…

Read more »

Senior Man Sitting On Sofa At Home With Pet Labrador Dog
Dividend Stocks

RRSP Investors: Don’t Miss Out on This Contribution Hack!

This hack has so many benefits for you -- not just when you put it in your RRSP but for…

Read more »

A red umbrella stands higher than a crowd of black umbrellas.
Dividend Stocks

Passive Income: 2 Safe Dividend Stocks to Own for the Next 10 Years

Dividend stocks such as Manulife and Fortis can help you generate a stable and recurring passive-income stream.

Read more »

Young woman sat at laptop by a window
Dividend Stocks

3 Dividend Stocks Everyone Should Own for the Long Haul

For investors looking for top-tier dividend stocks to buy and hold for the long term, here are three of my…

Read more »