Canadian pensioners have to keep an eye on their income to avoid being hit with Old Age Security clawbacks.
What’s the risk?
The government counts all of your net world income when determining whether it will impose an OAS pension recovery tax. The minimum threshold for the 2019 income year is $77,580.
Once net world income moves above that amount, a clawback amounting to 15% of the income above the limit kicks in until the income tops the maximum income threshold, which is set at $126,058. At this point, the full OAS would be clawed back.
Income of nearly $80,000 sounds like a lot, but people with decent defined-benefit pensions can easily hit that level when the income is combined with other earnings and pension sources such as RRSP withdrawals, CPP, or RRIF payments.
In addition, income from a hobby or part-time job would also count toward the limit.
One way to get extra income without putting the OAS at risk is to earn it from investments in dividend stocks held inside a Tax-Free Saving Account (TFSA).
Let’s take a look one top Canadian company that serves as a good example and might be an interesting pick to start an income-focused TFSA today.
Royal Bank of Canada
Royal Bank of Canada (TSX:RY)(NYSE:RY) earned $12.4 billion in fiscal 2018 and is on track to top that amount this year.
Customers of the bank might think that $1 billion per month in profits is too high and they should get a break on their banking fees. Investors, however, are happy to collect the steady stream of dividends that the bank pays out as a result of the strong performance.
Royal Bank gets its revenue from a variety of segments in the financial industry, including wealth management, capital markets, insurance, personal banking, and commercial banking. The company also generates revenue from a diverse geographic base.
Canada is the main source, providing 62% of total revenue. The United States accounts for 23%, and that could grow if the bank makes additional acquisitions south of the border, similar to the US$5 billion purchase of City National it made in 2015. The international business rounds out the final 15% of the revenue stream.
Royal Bank raised its dividend twice in 2019, and ongoing annual increases of 5-10% should be on the way, in line with expected gains in earnings per share. The current dividend provides a yield of 4%.
Royal Bank is investing heavily in new digital products and solutions to ensure it remains competitive in the rapidly evolving world of mobile payments and online banking.
On the risk side, the bank has a strong capital base that ensures it can ride out any economic downturn. Royal Bank maintained its dividend during the Great Recession 10 years ago and has survived every major financial crisis that has occurred in the past 150 years.
The bottom line
Royal Bank should be a solid buy-and-hold pick to anchor a basket of top-quality dividend stocks. A portfolio with an average 4% dividend yield would generate $2,540 per year per person on the current TFSA contribution space of $63,500. That’s $5,080 per year for a couple!
