Can Canadians with zero savings retire and depend on only their Canada Pension Plan (CPP) for sustenance during the sunset years? There are several reasons why the answer is a big “NO.”
According to the CPP Investment Board (CPPIB), the fund manager of the CPP funds, the CPP helps you retire, but it’s not a retirement plan. The pension fund manager also stresses that Canadians are responsible for saving money for their retirements. Thus, it’s safer to realize early on that your CPP is guaranteed income to cover just the basic needs in retirement.
Assuming you’re 65 today and a new pension recipient, the maximum monthly CPP is $1,203.75. Since not all users contribute enough to qualify for the max, the average is only $619.44 per month. Do some pencil-pushing and compare the amounts against your anticipated retirement expenses. There should be an income gap you need to fill.
The advice of CPPIB is to start the process of saving for retirement sooner than later. Most long-term investors have either Royal Bank of Canada (TSX:RY)(NYSE:RY) or Fortis (TSX:FTS)(NYSE:FTS) as their principal sources of retirement income. Both aren’t the highest dividend payers, but the payouts are rock steady and should be everlasting, like the CPP.
Blue-chip asset for retirees
Canada’s largest financial institution emerged stronger from the pandemic. RBC is a blue-chip asset, no less. The $182.22 billion bank has more cash in the coffers and is ready to reward investors with higher dividends. However, the Office of the Superintendent of Financial Institutions (OSFI) has yet to lift restrictions on dividend hikes that have been in effect since March 2020.
Nonetheless, current investors are content with the 25.76% year-to-date gain on top of a decent 3.38% dividend. If you want to match the average monthly CPP with investment income, you’ll need to accumulate at least $220,000 worth of RBC shares today. As of September 24, 2021, the share price is $127.90.
Furthermore, RBC’s dividend track record is an impressive 151 years. The market noise or threat of a correction shouldn’t worry you. The price could decline, but the bank stock will still keep you whole on the dividend payments regardless of the market environment.
Top-tier defensive stock
Fortis is the go-to asset when investors fear a market crash or economic downturn. The top-tier utility stock offers capital protection and dividend growth. At $57.09 per share, the corresponding dividend yield is 3.54%. Assuming you can invest $150,000 today, your money will compound to $300,783 in 20 years.
The $26.9 billion utility company has rewarded investors with a 5,577.06% (12.71% CAGR) in the last 33.76 years. Management has raised its dividends for 47 consecutive years. The target is an average annual dividend growth of 6% through 2025.
Fortis won’t experience cash flows or can sustain payouts to shareholders as nearly 99% of earnings come from the regulated transmission and distribution businesses. Besides the low-risk business model, the competitive advantages are operating expertise, financial strength, and extensive utility footprint in North America.
Lifetime income streams
CPP users should heed the advice of the CPPIB. Your pension will be available when you retire, but not enough to cover all your financial needs. If you have free cash you won’t need anytime soon, invest in RBC or Fortis. Hold the stocks forever for lifetime income streams.