Do you want to create your own pension and minimize your dependence on the Canada Pension Plan (CPP)?
If so, you might want to consider investing in dividend stocks.
Dividends provide cash income that is paid to your account once per quarter, or once per month. You can use this cash income to supplement your CPP, OAS, or defined benefit (DB) pension income. If you hold your dividend stocks in a tax-free or tax deferred account, you can even avoid/defer taxation on the dividends!
Technically, you can create retirement income with any type of stock, dividend-paying or not. However, ample research shows that dividend payments are less volatile than stock price movements, making them ideal for those who are depending on their investments to pay their regular bills.
In the ensuing paragraphs I’ll explore how you can create a homemade pension with dividend stocks, starting with account selection then moving on to investment ideas.
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Step 1: Pick the right accounts
The first and most crucial step in building a homemade pension is to pick the right accounts to hold your investments in. The best choices are the tax-free savings account (TFSA) and registered retirement savings plan (RRSP). The TFSA lets you hold investments and withdraw proceeds tax-free. The RRSP lets you hold investments tax free and provides a tax break when you make a contribution, but proceeds are taxed when withdrawn. To determine which option is truly best for you, speak with a licensed Canadian financial advisor. They will be able to tell you which account is ideal for your personal circumstances.
Step 2: Create a short list of stocks
Once you have your accounts ready, it’s time to come up with a short list of stocks. Generally speaking, if you want high income, dividend stocks are best. There is some academic debate about whether dividends are truly relevant; however, stocks with long dividend track records usually deliver good returns and provide high income. So, they’re logical choices.
Consider Fortis Inc (TSX: FTS), for example. It’s a Canadian dividend stock with 52 consecutive dividend hikes under its belt. Its 52-year uninterrupted dividend growth streak is among the longest of any TSX stock. Fortis is a regulated utility, a fact that explains its stable and slowly-growing revenue. The company isn’t an explosive grower, but its earnings are quite dependable, because the company supplies an essential, government regulated service. Fortis stock has a 3.3% dividend, and the payout has a long history of growing. So, an investment in Fortis stock be a contribution to your diversified private pension portfolio.
Step 3: Invest (and re-invest)
Last but not least, it’s time to actually make the investments you selected from your short list. This can be done through any reputable Canadian brokerage in a matter of seconds. Truthfully, trading is the least difficult part of investing – almost an afterthought. It’s the planning and preparation leading up to placing trades that really matters. If you take your time and do thorough research at steps one and two, you should have a good foundation for making sound, profitable investments.
