How to Create Your Own Pension With Dividend Stocks

When it comes to pensions, the Canada Pension Plan (CPP) serves as the benchmark, as every Canadian in the workforce gets CPP between the ages of 60 and 70. The Canada Revenue Agency (CRA) determines the CPP payout, and for 2026, the maximum payout is $1,507.65 per month. You can get the maximum CPP if you contributed the maximum amount for 39 years.

We took the maximum self-employment contribution for the last 39 years, as they contribute for both the employer and employee. The total contribution stood at $154,642 after including the 2026 contribution. If the monthly CPP payout is $1,507.65, it is 1% of the cumulative contribution of 39 years.

CPP vs. your own pension

With the CPP, you can’t determine the payout or say where to invest. The only thing you can determine is whether to collect the payout at age 60, 65, or 70. However, the payout is guaranteed, and you don’t need financial planning to get CPP, as the CRA has done it for you.

What if you want to take a career break for a year at age 45 and live off a pension? In such a scenario, having your own pension comes in handy. You are in full control of your pension, how much to invest, where to invest, and when to take a payout and when to stop. You can also make your pension tax-free by investing through a Tax-Free Savings Account (TFSA).

How to create your own pension with dividend stocks

If you want your own pension to match the CPP payout, your portfolio should pay 12% annually so that 1% of your investment can be paid every month. A 12% dividend yield is risky. But you can earn such a high yield in fundamentally strong stocks by compounding dividends.

CT REIT

The landlord of Canadian Tire, CT REIT (TSX: CRT.UN), offers a 5.76% annual yield paid out in 12 monthly installments. It is among the few real estate investment trusts (REITs) that offer a dividend-reinvestment plan (DRIP) and even grows dividends at an average growth rate of 3%. CT REIT manages to offer both DRIP and dividend growth because of its special arrangement with Canadian Tire. The REIT has the first right to buy, develop, and intensify a Canadian Tire store. Moreover, the rent grows by 1.5% annually. The increasing rent and addition of new stores help CT REIT earn higher cash flow, which it passes on to unitholders.

The REIT has a dividend-payout ratio of 73.5%, which shows it has ample financial flexibility to pay debt and grow dividends even in a weak economy.

Although CT REIT has a 5.73% yield, it can become 14% with DRIP, as the dividend amount is reinvested to buy more income-generating units. A $10,000 investment in 2014 would have bought 897 units, which would generate $582.96 in annual dividends with a 5.8% yield then. This dividend amount, when reinvested, accumulated 49 more units and, over the years, increased the dividend by around 150%. After 12 years of compounding through DRIP, your realized dividend yield on your $10,000 TFSA investment is 14.4%.

Capital Power

Capital Power (TSX: CPX) is another dividend stock that grows its dividend and started offering DRIP in 2023. Its source of cash flow is acquiring, developing, and maintaining power plants. Its key focus is now on building natural gas-fired power plants for artificial intelligence data centres and has a US$1 billion earnings before interest, taxes, depreciation, and amortization opportunity. The company aims to maintain a 2-4% dividend growth till 2030.

The DRIP, dividend growth, and current 4.25% dividend yield make Capital Power an ideal choice for a personal pension.