In late November 2019, the Canada Revenue Agency (CRA) announced that the maximum pensionable earnings under the Canada Pension Plan (CPP) for 2020 is going up from $57,400 to $58,700.
CPP contributors or users who earn more than the maximum pensionable earnings in 2020 are not permitted or required to make additional contributions to the CPP. Also, the employer and employee CPP contributions have increased to $5,796 ($2,898 each) due to the increase in contribution rates from 5.1% to 5.25% in 2020.
The enhancements mean higher annual contributions for CPP users, particularly the self-employed who will contribute the full amount. For business owners, the changes will result in higher payroll or an increase in administrative costs. If you’re an entrepreneur, are you ready to deal with the higher CPP contributions?
Cushion the impact
Any additional cash outlay is a financial challenge for both the employed and self-employed. Thus, it emphasizes the need to invest rather than just hoarding cash for future use.
Investing in dividend stocks like BCE (TSX:BCE)(NYSE:BCE) and Algonquin Power (TSX:AQN)(NYSE:AQN) for example, allows you to grow your money, create an extra income, and cushion the impact of higher expenses, such as the increased CPP contribution.
Besides being the leader in the telecom industry, BCE is a known dividend aristocrat. With its 5.23% dividend, and suppose you had an extra $50,000 that you wanted to invest, you’ll have $217.92 in monthly income without depleting your capital.
Another advantage is business continuity. BCE operates in a near-monopoly where only three players dominate. Likewise, its wireless, wirelines, and media business segments are consistent money makers. Moreover, BCE’s ongoing concern is to pump in millions of dollars for network upgrades and expanded coverage.
But your most significant benefit from BCE is investment protection. Canadians need BCE’s products and services 24×7 and all year long. With the company earning billions in revenue, you insulate your money from economic downturns, if not a recession.
Algonquin boasts of highly diversified renewable energy assets. This $9.75 billion company is recession-resistant as the majority of its utility services (from hydroelectric, thermal, and wind to solar power facilities) are covered by regulated agreements.
The company is regarded as a utility powerhouse in North America, with assets worth more than $10 billion and growing. Algonquin is only three decades old, but the stock has a dividend growth streak of years. The current yield is 4.01%.
As an illustration, assuming you wanted to invest money equivalent to the maximum pensionable earnings of $58,700, your monthly dividend earnings from Algonquin would amount to $195.67. A holding period of five years would produce a healthy return of $12,717.53.
Algonquin is preparing to invest $9.2 billion to build new power plants as well as add more utility infrastructure. The time-frame is five years, and by 2025, the company should be among the forever assets to own in the utility sector.
Note that the figures mentioned are examples and that you should properly diversify your holdings by owning more than just these two stocks.
Time to invest
The new CPP contribution might disrupt your budget and restrict you financially in 2020. Hence, it’s time to compound your savings and invest in dividend stocks like BCE and Algonquin. The two stocks can be for long-term holdings as well.
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Fool contributor Christopher Liew has no position in any of the stocks mentioned.