Don’t dream of bidding goodbye to your nine-to-five job. Plan it! Start investing now with a conservative dividend investing strategy. Many well-established Canadian companies pay out dividends from their profits to their shareholders. By owning shares of these companies, you can earn substantial dividend income over time.
Notably, the dividends you generate don’t necessarily have to replace your nine-to-five job’s income entirely because Canadian dividends are more favourably taxed than your job’s income.
Image source: Getty Images
Dividend income is taxed at a lower rate
For example, let’s say, John lives in Ontario and earns $60,000 in taxable income this year. He is subject to an average combined federal and provincial income tax of approximately $12,608 for an average tax rate of a little over 21%. In other words, John’s take-home income is about $47,392. This year, he could earn up to $55,867 in eligible Canadian dividends in his non-registered (or taxable) account without being taxed if the dividends are his only income.
Assuming John is able to earn an average yield of 4.5% from a diversified dividend portfolio today, his portfolio value would need to be about $1,053,156. It follows that the earlier you start investing, the sooner your money can work for you because you can choose from a basket of dividend stocks that increases your dividends over time. To make the compounding faster, you can reinvest your dividends to generate even more dividends.
For example, if you invest $5,000 in Bank of Nova Scotia (TSX: BNS) shares today, you would get a dividend yield of about 6.6%, or income of approximately $330, in your first year. Let’s say the share price grows by 5% per year, and you continue to invest $5,000 at the start of each year. The investment would grow to almost $66,034 in 10 years. And if it were to still yield 6.6% at the time, you would earn about $4,358 in dividend income from your position in year 10. This is just one position. Visualize other safe dividend ideas for your diversified portfolio.
Do you fancy flexible work hours?
You might also prefer to work as a part of the gig economy with flexible hours in (different kinds of) work you enjoy over a nine-to-five job. Contract work and potentially other part-time work could spice up your life and complement your dividend portfolio to make you the income you need. In this case, you can ditch your nine-to-five job sooner than if you were making income only from your dividend portfolio.
Another dividend stock idea
Other than Bank of Nova Scotia, another stock you can rely on for safe passive income is Fortis (TSX: FTS). The utility stock has increased its common stock dividend for 50 consecutive years. It is already ingrained in its DNA to maintain a safe and growing dividend.
The utility holding company is diversified across 10 regulated utilities across Canada, the United States, and the Caribbean. About 93% of its assets are for transmission and distribution of electricity or natural gas. These assets provide essential services to its customers in good and bad economic times, allowing Fortis to make highly reliable earnings throughout the economic cycle. It also maintains a sustainable payout ratio that’s about 75% of its earnings this year. At $54.36 per share at writing, FTS offers a dividend yield of 4.3%.
