Welcome to the second update of the year and the Million Dollar Journey August 2023 Financial Independence Update! You can follow my entire financial journey by getting updates sent to your email, Facebook, Twitter, or both.
For those of you who are new to the site, in June 2014, when I reached $1 million in net worth (at the age of 35), I changed my focus to reaching financial independence by increasing my passive income sources until they could support our family’s costs. primarily through tax-effective dividend investing and passive indexing.
We have the following objectives for our passive income:
How It All Started – Original Financial Goal
I usually find it fascinating to reflect on past objectives. After reaching the million-dollar net worth milestone, the following was the main objective:
Our annual recurring expenses right now are around $55,000 (after taxes), however that doesn’t include travel charges (and no mortgage or car payments). While travel is important to us, we still view it as a discretionary expense (and frankly, a luxury).
We might reduce vacation time for the entire year if finances ever tighten. This means that our ultimate objective for passive income is to have enough to meet recurrent costs, and for company (or other active) revenue to cover indulgences like travel, savings for a new or used car, and just excess cash flow.
Main financial objective: To produce $60,000 in after-tax passive income by the end of 2020. (age 41).
By achieving this goal, my family of four (two adults and two kids) would be able to live comfortably without relying on my full-time job (most recently a one-income family).
I would then have the option to stop working full-time, allowing me to devote more time to my other interests, hobbies, and business ventures.
Update: It’s important to highlight that, due to rising inflation and the cost of enrolling teenagers in extracurricular activities, our annual expenses have risen to close to $65k after taxes (as of 2023).
Achieving Financial Freedom: What has transpired since 2020, you might be asking yourself? I’m glad to say that, a little earlier than expected, we achieved financial independence in 2020. While continuing to develop the portfolio and reinvest those dividends is the current objective, I’m noticing that more emphasis is being placed on indexing as time passes.
Having said that, I haven’t sold any dividend positions in favor of index ETFs as of the present, in 2023. not yet, at least. In reality, those hefty dividends have been covering our expenses ever since we quit our full-time salaried jobs! There is a lot of value in dividend investing for individuals who want to retire early, even while I frequently state that it is not for everyone (such as those who are aiming for a traditional retirement, who have big incomes, and who want to invest in taxable accounts). If you don’t have any other sources of income, dividends as an income source are very tax-efficient.
See here to see how much our passive income has increased.
FINANCIAL INDEPENDENCE UPDATE – AUGUST 2023 – SECOND UPDATE OF THE YEAR
What has been going on with the markets in 2023? The narrative of 2023, in my opinion, will be rapidly increasing interest rates! So, highly indebted businesses (such as utilities and real estate firms) usually perform poorly, but on the other side, bond prices usually stabilize over time!
In terms of the overall market, technology has taken over as of this week (particularly AI stocks), causing the S&P500 to soar to about the 4500 level, representing a YTD gain of about 16.9% (not including dividends)!
Will this performance continue all year long? Who knows, these market headwinds may still exist: tightening of the money supply, inflation (albeit growing more slowly than last year), and possibly higher interest rates (appears to be flattening).
1-year S&P 500 Chart
In 2023 so far, the TSX has likewise been comparatively flat. The primary Canadian index is up roughly 3.7% YTD, despite the fact that the past several months have been somewhat of a see-saw ride (not counting dividends). I predict that the TSX will increase in value if oil prices rise.
What ought a novice investor to do? Close your eyes and keep buying when you have the money. According to research, if your time horizon is sufficiently extended, it’s more important to spend time in the market than it is to time it.
How Often And When Do I Make The Decision To Buy?
When solid dividend companies’ valuations are favorable, I want to purchase them (along with indices). While they are being sold off, in other words (ie. dip). Several of my favorite Canadian dividend stocks are displayed here.
I’ve quit full-time salaried employment, as I’ve said in prior updates, which means I’m spending the profits I’ve grown and cultivated over the past 15+ years. My investment cash position has decreased as a result throughout the years, therefore I won’t be making any more significant investment acquisitions for the time being.
Reinvesting those increasing dividends is what drives the majority of portfolio expansions. I have so far invested modest sums of money in the following Canadian dividend holdings in 2023:
- TD Bank (TD)
- Emera (EMA)
- Capital Power (CPX)
- BCE (BCE)
- Waste Connections (WCN)
- Brookfield Infrastructure (BIP.UN/BIPC)
- TC Energy Corporation (TRP)
- Canadian Natural Resources (CNQ)
- Telus (T)
- National Bank (NA)
- Canadian Tire (CTC.A)
- Index ETFs (not quite dividend stocks but they are likely held within the indexes)
Choosing strong firms with a history of dividend increases is the aim of the dividend growth strategy. Check out the additional dividend increases that have occurred since the last report below.
2023 Dividend Raises
My portfolio’s Canadian holdings have already seen dividend increases from the following businesses this year:
- CU.TO (1% increase)
- MRU.TO (10% increase)
- CNR.TO (8% increase!)
- BIP.UN/BIPC (6.3% increase)
- CNQ.TO (5.9% increase!)
- NTR.TO (10% increase)
- BCE.TO (5.2% increase)
- BEPC.TO (5.5% increase)
- TRP.TO (3.3% increase)
- ENGH.TO (18% increase!)
- TRI.TO (10% increase)
- T.TO (3.56% increase)
- L.TO (10% increase)
- WN.TO (8% increase)
- FTT.TO (5.9% increase)
- H.TO (6% increase)
- SLF.TO (4% increase)
- BNS (2.9% increase)
- BMO (2.8% increase)
- CM (2.35% increase)
- RY (2.27% increase)
- NA (5.2% increase)
- IMO (13.6% increase)
- EMP.A (16.6% increase)
- CPX (6% increase)
Top 10 Holdings
Our top ten holdings fluctuate a lot. This time, there is a good balance of equities in the industrial, infrastructure, utility, energy, telecom, and financial sectors.
Here are the current top 10 dividend holdings in our whole portfolio:
- TD Bank (TD)
- Royal Bank (RY)
- Canadian National Railway (CNR)
- Fortis (FTS)
- Brookfield Infrastructure (BIPC/BIP.UN)
- Emera (EMA)
- Bank of Montreal (BMO)
- Canadian Natural Resources (CNQ)
- Thompson Reuters (TRI)
- CIBC (CM)
*not counting index ETFs (they are my largest holding).
DIVIDEND INCOME UPDATE
As previously indicated, there have been several laudable dividend hikes, and we were able to invest some money in dividend-paying firms.
Our forward annual dividend income has increased to $77,850, as shown in the chart below, thanks in large part to the dividend increases. Providing portfolios have enough time to compound, slow and steady does produce results!
All of our family’s accounts, including non-registered (including leveraged accounts using the Smith Manoeuvre), RRSPs, corporate investment accounts, and TFSAs, are included for calculating the dividends.
Some of you might be considering using my leveraged investing account given the increasing interest rates (Smith Manoeuvre account). I’ve been withdrawing dividends to pay down my HELOC even though the required payments have significantly increased; as of the time of this writing, the HELOC is breaking even. Even after accounting for the tax relief (prime is currently 7.2%), the dividends are still in the black.
The dips and sell-offs (i.e. volatility) in the world markets on a regular basis can be terrifying! The dips, however, appear to be more of a resting period before a move higher if you zoom out and observe the long-term trend.
What further puts my mind at ease is that the dividends remain coming in, regardless of the state of the market. Receiving money whether the markets are up or down is one of the main advantages of dividends for retirees. There is no ideal answer, as there rarely is. As was already established, not everyone should invest in dividends.
Other dividend investors and bloggers, I’ve seen, frequently contrast their dividend income with an equivalent hourly wage. Based on a 40-hour work week, $77.8k/year is equivalent to around $39/hr in passive income, and depending on how the assets are set up, most of it may be tax-free!
With no other income in early retirement, you can earn up to $50,000 in dividend income (inside a taxable investment account) and pay very little to no income tax, according to a post I authored about dividend income taxation (depending on the province). If you can split the dividend income with a partner or spouse, the advantages are considerably larger.
Here is a guide on how to create a dividend portfolio if you’re interested in the dividend growth plan as well. You may get a basic notion of the names I’ve been adding to my portfolios by looking at this list.
Check out my piece on the top all-in-one ETFs in Canada if you want a more straightforward investment approach that outperforms the majority of mutual funds currently available.
As the iShares XAW is my largest individual holding, I support indexing.
Maintain your long-term plan and continue investing your cash flow.
You’ll be grateful for it when you’re richer in the future (sooner than you think!).