Over the years, I've written dozens of columns about dividends: Dividends are great for retirees, dividends get a tax break, dividend stocks have outperformed non-dividend stocks, dividend stocks pay you to sit there and do nothing.
All true. But today, I want to explore a benefit of dividend investing that I haven't discussed before – namely, that dividends can help offset the growing costs of raising a family.
As a married father of two kids, ages 10 and 13, this is a subject I can speak to first-hand.
Years ago, I started tracking my family's expenses (something financial planners recommend because it's the only way to know where your money is going). When my kids were very young, my wife and I were able to get by on surprisingly little money: In 2007, for instance, we spent just $35,000, which meant there was plenty of money left over to invest.
Even after my wife left her job to raise the kids full time, we still had ample cash for RRSP, RESP and TFSA contributions, plus the odd vacation and dinner out.
As a one-income family, we lived frugally – we shopped at No Frills, took public transit and borrowed books from the library – but we never felt deprived.
We still do all those things, but now the gap between how much money comes in and how much goes out the door has narrowed considerably. I haven't run the numbers yet – I'm waiting until all my 2015 bank and credit-card statements are in – but this may be the first year since our kids were born that we are spending more than my after-tax employment income.
How did this happen? Simple: My kids got more expensive.
My son got braces (total damage: $7,600; my daughter will also soon be doing her part to keep the neighbourhood orthodontist out of poverty). Both my kids also started playing hockey (at a cost of several thousand dollars a year, including house league and select league fees, skates, sticks, hockey skills sessions, three-on-three summer hockey, transportation expenses and hotel rooms for tournaments. Oh, and tape – lots and lots of tape.). In recent years, both my kids have also discovered the joys of overnight camp, at a cost of close to $1,000 a week. So far, we've limited them to seven days each, but they have such a good time that next summer we're letting them stay longer.
And, of course, there are growing bills for groceries, clothing and cellphones (we held out as long as we could; my son got his first phone a few months ago). We don't begrudge our kids any of these expenses: If we're going to save money, we're not going to do it by denying them experiences that enhance their lives, build friendships and create life-long memories. Nor do we consider our kids spoiled; there are no iPhones or Xboxes in our house and, unlike many of their friends at school, they've never been on a European or Caribbean holiday.
What does any of this have to do with dividends? Well, the money that we were able to save and plow into dividend-paying investments when our kids were young is now helping to offset the escalating costs of raising them. Thanks to the compounding effects of dividend growth and dividend reinvestment, the income from our portfolios has grown substantially.
To take one example, back in 2007 – when my son was five and my daughter two – Enbridge paid annual dividends of 61.5 cents a share (adjusted for a 2011 stock split). The dividend has since tripled to $1.86 a share, and I'm expecting another increase before the end of the year. Most of the other stocks I own – banks, power producers, utilities, telecoms and real estate investment trusts – are also paying significantly higher dividends now.
With what's left of my after-tax employment income – if there's anything left at all – there is no way I could max out our TFSAs, RRSPs and RESPs now. But thanks to our dividend income, I'm able to scrape together the required cash. If I come up short, I can always make an in-kind contribution of securities from our non-registered portfolios. (A nod here to grandparents, who have also made generous contributions to our kids' RESPs.) There are two main lessons here. First, kids get a lot more expensive as they grow up. It's something you hear all the time but, until you experience it, you can't really appreciate how much these costs can grow. Second, if you can invest when your kids are young – or even before they are born – you will reap the benefits as they get older.
We consider ourselves extremely fortunate to be able to provide for our kids. I also recognize that, particularly with the soaring costs of housing (we bought our house when real estate was much cheaper), many couples with young children today have nothing left over to invest after paying their expenses.
But for those who can find the money, investing early won't just set you up for a comfortable retirement. It will help you get through all those expensive years in between.