Are you worried that Canada Pension Plan (CPP) won’t pay enough to cover your expenses in retirement?
If so, your concerns are valid.
According to Canada.ca, the average CPP payout is only $811 per month. That’s not enough to cover rent in most Canadian cities, let alone all of a person’s living expenses. Once you add Old Age Security (OAS) to your CPP, the picture gets a little better, and you can increase your CPP amounts by delaying retirement. However, the general principle is that CPP does not pay enough for most Canadians to live on.
In this article I will explore how you, an individual Canadian, can combat paltry CPP payments with dividend stocks.
Hold dividend stocks in your TFSA
Holding dividend stocks in a TFSA is one of the best ways to add income to your portfolio that contributes to your retirement. With $1 million invested at the market yield, you add $30,000 per year in passive income. With high-yield stocks, you can get that amount with only a few hundred thousand invested.
How much extra income you could add
Let’s imagine that you invested in a dividend stock like Enbridge (TSX:ENB) instead of a broad market index fund. ENB stock pays double the market’s yield (in fact, slightly more than double), so you can get to $30,000 a year in passive income with less than $500,000 invested in it. With a 6.66% yield, ENB will pay $30,000 a year on a $454,000 position.
Now, I know what you’re thinking: “Sure, $454,000 is much less than a million, but it’s far more than you can fit in a TFSA. How will this ever work?”
It’s true; a TFSA can only have $88,000 in lifetime contributions today. But more space is added every year. If space keeps getting added at a rate of $6,000 per year, then, in a few decades, Canadians who were 18 or older in 2009 will have over $200,000 in room. With some capital gains in the mix, it will be possible to get to a $454,000 TFSA portfolio.
In fact, some Canadians have already run their accounts up to multiple millions of dollars by beating the market — although that obviously won’t happen for most people. The point is, getting to a several hundred-thousand-dollar TFSA by retirement is possible for many.
This is not to say that you should go out and fully invest your entire TFSA into Enbridge stock. The Motley Fool generally recommends that investors hold at least 25 stocks that are spread out over many industries. However, that doesn’t mean you have to give up on the dream of a 6% yield portfolio. By adding other 6% yield stocks, like Bank of Nova Scotia, First National Financial, and Canadian Imperial Bank of Commerce, you can achieve a 6% yield within a diversified package.
It’s entirely possible to achieve a portfolio that’s both safe and high yield. The only downside is that the high yield in itself doesn’t guarantee high returns. It does, however, produce regular cash flow.
