Retiring in Canada: A Simple $1,000/Month Dividend Plan to Supplement CPP

Retirees, here’s how you can turn your life savings into dividend income by investing in diversified Canadian ETFs.

Key Points
  • CPP alone (average $848/month; max $1,433) likely won’t cover retirement needs, so retirees should plan for supplemental income like dividends.
  • A diversified dividend ETF such as TSX:CDZ (3.5% yield) could deliver about $1,000/month with roughly $343K invested, but dollar-cost averaging and holding laddered GICs/cash to cover 11-15+ months of expenses can protect against market downturns.
  • 5 stocks our experts like better than iShares S&P/TSX Canadian Dividend Aristocrats Index ETF

Chances are your Canada Pension Plan (CPP) pension income is not enough to provide a comfortable retirement life – and it’s not meant to be. It’s supposed to be complemented by other income like Old Age Security (OAS), and more importantly, your life savings. 

A Canada Pension Plan Statement of Contributions with a 100 dollar banknote and dollar coins.

Source: Getty Images

How much CPP pension income do you get?

Your CPP pension income depends on a number of factors:

  • The age you start receiving your CPP pension
  • How much and for how long you contributed to the CPP 
  • Your average earnings 

While the maximum CPP pension income at age 65 is $1,433 this year, the average CPP pension is only $848.37 in October to December. This is not nearly enough. That’s where dividend income can come in.

Using dividend income to supplement your CPP

Retirees can turn their life savings into dividend income. Ideally, it’d be better to set up your dividend portfolio over at least several years to properly build a diversified portfolio across key sectors like banks, utilities, energy, telecoms, technology, consumer staples, health care, and real estate with attractive or at least reasonable entry points.

To immediately diversify, you can invest in an exchange traded fund (ETF) like the iShares S&P/TSX Canadian Dividend Aristocrats Index ETF (TSX: CDZ), which provides regular monthly dividend income from across about 90 holdings. Its recent distribution yield is 3.5%. So, to earn $1,000 per month, you need to invest just over $342,857.

The fund provides exposure to a diversified basket of quality Canadian dividend-paying stocks that have increased dividends for at least five consecutive years. 

Sector wise, it is about 23% in financials, 15% in energy, 13% in real estate, 11% in utilities, 10% in industrials, 9% in consumer staples, 8% in communications, and 2% in information technology. 

Its top holdings include:

  • 3.6% in Allied Properties REIT
  • 2.9% in South Bow
  • 2.6% in TELUS
  • 2.3% in Toronto-Dominion Bank
  • 2.3% in CT REIT
  • 2.2% in Power Corp.

To prevent buying at a market high, you can dollar-cost average into the fund over time to average your cost per unit.

Ensure you’re covered for market downturns

Don’t invest all your life savings for your income stream, though! Ensure your cash needs are covered for market downturns that are sure to occur sooner or later. 

Bear markets – a drop of 20% or more – average about 11 to 15 months, although they could be much shorter or longer depending on their cause and severity. 

Therefore, on a rolling period of 15-plus months, retirees need to cover their cash needs via risk-free investments like laddered guaranteed investment certificates (GICs) that protect their principal, preventing them from having to touch their longer-term investments in the stock and bond markets during market downturns.

Investor takeaway

Before you invest your life savings in dividend income, ensure you cover your cash needs to protect yourself during market downturns. 

For example, your cash needs can be covered by laddered GICs and your savings account. 

To immediately diversify your monthly dividend income stream, invest in an ETF like the CDZ. Dollar cost average into it over time if you can.

Fool contributor Kay Ng has positions in TELUS. The Motley Fool recommends TELUS. The Motley Fool has a disclosure policy.

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