We are past the 60-day mark for the lockdown caused by the COVID-19 pandemic. The outbreak of this disease is causing concerns for the economy, and it has many Canadians of retirement age and nearing retirement to consider taking their Canada Pension Plan (CPP) payments early.
The stock market is in turmoil due to the volatility and has closed off many income-generating avenues like part-time jobs for Canadian retirees. In a situation like this, I would not mind considering starting the CPP payments earlier for a lower income.
Today I’ll discuss how you can continue to defer your pension payouts and how a dividend-paying stock that can help you accomplish that.
The need to make money
Retiring citizens need income more than any other age group of investors. Financial advisors push retirees into dividend-paying stocks and bonds instead of growth stocks to help them secure revenue generation streams during retirement. When you don’t have a job, you need a steady flow of cash, even if you are retired.
The CPP exists so that it can provide you a steady stream of cash during your retirement. However, if you begin collecting your CPP at 60, you stand to earn a lower income. The earlier you start collecting your CPP before your 65th birthday, the lower your pension payout will be. It’s a significant reason to defer your payments.
If you are a retired citizen, you might not want to defer your payment because you do not have a source of income. Pandemic or not, you need income to make it through a recession. You can’t consider bleeding your life savings dry. It would be a waste of all your hard work.
Using your savings to generate income
If you have some savings, there is an opportunity for you to create tax-free income by holding shares of a dividend-paying company. Dividend stocks can generate substantial income for shareholders each quarter. You can enjoy that income tax-free if you store the shares in a Tax-Free Savings Account (TFSA).
Rather than slowly using your life savings until you run out, a smarter bet would be to use your savings to create a revenue stream. Yes, the stock market is suffering through volatility right now, but it doesn’t mean that you can’t find income-generating assets that can help you through a recession.
You need to build a TFSA portfolio of reliable dividend-paying stocks that can help you earn a respectable income to ride the lockdown. To this end, Fortis Inc. (TSX:FTS)(NYSE:FTS) can be an excellent stock to begin creating such a TFSA portfolio.
Fortis is a Canadian utility sector operator. The company pays its shareholders with a juicy 3.54% dividend yield. The yield is the percentage of a stock’s value that it pays shareholders in dividends. For instance, if you have $2,000,000 worth of Fortis shares, you can earn $70,800 per year through dividends.
Of course, you can’t fit $2,000,000 worth of Fortis shares in your TFSA. The maximum contribution room in the TFSA after the 2020 update is $69,500. I would never recommend maxing out the contribution room in your TFSA with shares of just one company. I would, however, recommend allocating a significant portion of your TFSA to the Fortis stock.
You can also invest in shares of the stock and spread your position across taxable and tax-free accounts to earn a substantial income, with some of it being tax-free.
Earning an income is the only way you can make it possible to defer your CPP payments until you can get the maximum possible pension. A robust TFSA portfolio with income-generating assets can help you generate substantial passive income through dividends and help see you through the recession.
I would recommend building a diversified portfolio of reliable dividend-paying stocks for tax-free income. Fortis could be the perfect stock to begin the TFSA portfolio.
Motley Fool Canada's market-beating team has just released a brand-new FREE report revealing 5 "dirt cheap" stocks that you can buy today for under $49 a share.
Our team thinks these 5 stocks are critically undervalued, but more importantly, could potentially make Canadian investors who act quickly a fortune.
Don't miss out! Simply click the link below to grab your free copy and discover all 5 of these stocks now.
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.