Financial freedom doesn’t come from having $1 million if you don’t plan it wisely and make it last a lifetime. Financial freedom means having enough savings, investments, and income to live the lifestyle you want and choose a career you want while having money for the time when things go south. To secure your financial freedom, you need to diversify your investments and sources of income.
How to maximize income from CPP
The Canada Revenue Agency (CRA) gives you a monthly payout through the Canada Pension Plan (CPP) once you turn 65. You can delay this payout till age 70 and maximize your CPP returns. The CRA will add 0.7% every month to your CPP payout for the number of months you delay till age 70. This way, you can grow your CPP by 42% in five years. No dividend stock can give you 42% low-risk growth in monthly payouts in five years.
Remember CPP has a lower risk because the government pays you a pension from your CPP contributions. Dividends are subject to market risk.
The TSX has stocks that yield 10% and above, but these stocks have a higher risk of dividend cuts. Hence, it is wiser to maximize your CPP by delaying it till 70. But the decision to delay the CPP payout depends on your financial circumstances. If you are financially free and not dependent on CPP, you can delay the payout.
But how do we reduce our dependence on CPP? The CRA offers a Tax-Free Savings Account (TFSA) that allows tax-free withdrawal. You can use your annual TFSA contribution limit to create a pool of passive income.
How to generate steady TFSA income
You can determine your investment strategy depending on when you need your passive income. As children, you must have read the story of grasshopper and ants, where ants work tirelessly during the spring to save for the winters. You can decide your spring season and winter season. The springtime is when you are earning well. You can invest in growth and dividend stocks and even reinvest the dividend money you receive to build a larger portfolio.
BCE stock
BCE (TSX: BCE) is a great stock to earn regular dividends that grow annually, along with the option to reinvest the dividends. The telecom giant has created a 5G network across Canada and has expanded its fibre network to add more subscribers. The company is closing or selling nine radio stations and reducing its workforce by 3% to streamline its low-growth media operations and invest in high-growth areas like the cloud.
BCE has been paying dividends for over four decades and has grown them in most years. After 4G, BCE has managed to sustain 6% annual dividend growth due to higher subscriptions. I am optimistic about this stock even though it has slipped 10% since May over concerns about rising interest rates.
You can consider investing $300/month in this stock when it trades below $60 and lock in over 6% yield. In a year, you can buy 60 shares of BCE, and in five years, 300 shares. Each share will pay an annual dividend of $3.87 in 2023. You can get $232 in annual dividends on 60 BCE shares.
You can opt for BCE’s dividend reinvestment option that buys more shares of BCE from the dividend money without any broker charges. Or you can use this dividend money to reinvest in higher-yielding stocks.
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Portfolio diversification for higher income
I wouldn’t suggest investing in high-dividend stocks if you are near retirement, as it carries high risk.
But if you are far from retirement, say 8 to 10 years, you can consider having a small portion invested in risky dividend stocks like TrueNorth Commercial REIT, which offers up to a 12.7% yield. And a one-time investment of $200 in dividend income from BCE in the REIT can buy 85 shares that could pay $2/month or $24/year in distributions. This way, you can grow your $232 dividend to $256 if True North Commercial REIT sustains its distributions.
With a $300 monthly investment, you can diversify your investments and enhance your passive income.
