Many middle-aged Canadians nearing retirement wonder whether or not they can rely on Canadian Pension Plan (CPP) payments to accommodate a comfortable retirement income.
Based on the figures obtained in 2019, retiring at the age of 65 can see you earn an average of $670.16 per month. The most you can collect from your CPP is $1,154.58. Not everybody qualifies to receive the maximum CPP payments, so it is best to assume more conservative figures.
I think that even if you are getting the maximum amount from your CPP, it can be challenging to sustain a comfortable lifestyle in retirement. Assuming you get the more conservative amount, it can be impossible to make ends meet, even after cutting all your unnecessary expenses.
The improved Canada Pension Plan
To qualify for the CPP, an individual needs to be 60 years of age and should have contributed at least once to this contribution plan. It is generally advisable to start collecting your CPP payments from the age of 65, so you do not get the payments at a lower rate. Delaying the collection of your CPP payments till 70 can allow you to earn more.
A recent enhancement made by the government to the CPP has increased the total contribution rate to 10.5% of pensionable earnings. The contribution rate will increase further to almost 12% by 2023. Even with the enhanced CPP, Canadian pensioners can only obtain a third of their pre-retirement income through the CPP.
The CPP alone cannot help you get sufficient income for your retirement. You need to supplement your CPP payments through intelligent financial moves. To this end, I believe investing in high-yield dividend-paying stocks like Alaris Royalty (TSX:AD) is an ideal way to go.
A high-yield dividend stock
Allocating some contribution room in your Tax-Free Savings Account (TFSA) to a high-yield dividend-paying stock can allow you to use your TFSA as a secondary revenue generation source. The TFSA will enable you to make earnings on investments stored in the account free of tax.
Investing in a dividend-paying stock will add free cash in your account on a monthly or quarterly basis, depending on the payouts by the underlying company.
Alaris Royalty is a private equity firm that is maximizing its profitability. It follows an unconventional business model where it buys businesses solely to reap benefits while allowing the businesses to retain control.
Instead of purchasing the preferred voting shares, Alaris buys non-voting preferred shares of the companies it acquires. It allows the businesses Alaris acquires to operate under existing management without losing control of operations. Alaris has used this strategy well. It has a remarkable profit margin of more than 60%, and it has increased its net income by 9.6%.
As a shareholder, you can enjoy a fantastic dividend yield of 7.4% without worrying about the stock’s ability to sustain such a high payout ratio.
At the time of this writing, Alaris Royalty stock is trading for $22.36 per share. It pays out $0.1375 per share every month. Investing a portion of the contribution room in your TFSA to shares of Alaris stock can help you significantly boost your passive monthly income through Alaris’s dividends alone.
I think supplementing your retirement income using high-yield stocks in your TFSA can be a viable strategy to sustain a more comfortable life in retirement. Alaris could be one of the investments in your portfolio to help you build a TFSA with a substantial dividend income.
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 Adam Othman has no position in any of the stocks mentioned. The Motley Fool recommends ALARIS ROYALTY CORP.