I am turning 71 this month, and I will be converting my registered retirement savings plan to a registered retirement income fund. Owing to some bad experiences with financial advisers in the past and growing risk-aversion as I get older, my RRSP (valued at about $500,000) is 87 per cent in cash, with about 10 per cent in mainly Canadian stocks and 3 per cent in bonds. I would rather do manual labour than work on financial matters, but with cash and guaranteed investment certificates paying next to nothing – and with no work pension – I need to generate additional income. What do you recommend? Should I use your model portfolio as a guide?
A desire to preserve capital is understandable, particularly for people who are worried about making ends meet in retirement. But taken to extremes, a focus on safety can be detrimental. Investors who are preoccupied with never seeing the value of their capital fall – even temporarily – miss out on opportunities where a small amount of additional risk can lead to much better returns.
With that in mind, my first piece of advice is that you should consider increasing your allocation to dividend-paying stocks in order to generate more cash flow. Without knowing how much income you have from other sources such as the Canada Pension Plan and Old Age Security, it’s difficult to know precisely what stock weighting you should be aiming for. But if you were to allocate, say, 60 per cent of your RRSP to dividend-paying equities, up from 10 per cent currently, you could generate $1,125 of income per month or $13,500 annually. This assumes an average dividend yield of 4.5 per cent, which should be easily achievable.
Many companies in my model Yield Hog Dividend Growth Portfolio (tgam.ca/dividendportfolio) yield more than 4.5 per cent, such as Canadian Imperial Bank of Commerce (CM; 5.2 per cent), Capital Power Corp. (CPX; 5.8 per cent), CT REIT (CRT.UN; 5.2 per cent), Canadian Utilities Ltd. (CU; 5.6 per cent), Emera Inc. (EMA; 4.7 per cent), Choice Properties REIT (CHP.UN; 5.5 per cent) and TC Energy Corp. (TRP; 5.9 per cent).
Sure, dividend cuts can happen. But analysts consider payouts from these companies to be quite secure, and most have a long track record of raising their dividends (although the pandemic has in some cases led to a temporary pause in dividend increases).
Getting back to your question, you indicated that you would rather do manual labour than devote time to investing, which leads to my second piece of advice: Instead of managing a portfolio of individual stocks, perhaps you should consider buying a dividend exchange-traded fund instead. ETFs give you excellent diversification with a single purchase, and they eliminate the need to research and follow individual stocks.
One of my favourites is the BMO Canadian Dividend ETF (ZDV), which holds a basket of about 50 companies including banks, insurers, pipelines, telecoms, utilities, railways, power producers and retailers. ZDV’s management expense ratio – which measures the annual cost of owning the ETF – is a reasonable 0.38 per cent, and the fund yields about 4.7 per cent, after fees, calculated by annualizing the most recent monthly distribution and dividing it by the current unit price.
You may also wish to consider investing a portion of your RRSP – say 10 per cent of your equity exposure – in an ETF that holds real estate investment trusts. One example is the BMO Equal Weight REITs Index ETF (ZRE), which charges an MER of 0.61 per cent and yields about 4.9 per cent.
Another worthy option – which is not strictly a dividend ETF but provides even better diversification – is the iShares Core S&P/TSX Capped Composite Index ETF (XIC). It holds more than 200 stocks, has an MER of just 0.06 per cent and yields about 3 per cent.
The dividend ETFs mentioned above are just a small sample of the funds available. Take your time to learn about the options. You’ll find a wealth of information with a Google search. There’s no reason you can’t buy a few different ETFs, including one that invests in the U.S. market.
With a portion of the remaining cash in your RRSP, consider purchasing a diversified bond ETF or short-term guaranteed investment certificates. GIC rates aren’t great – my broker is offering about 1 per cent on a one-year GIC – but that’s a lot better than cash. Just make sure that you leave sufficient cash in your account to fund your mandatory minimum RRIF withdrawals every year.
Remember that the value of your RRSP/RRIF will fluctuate more as you increase the equity weighting. But if you hold high-quality companies and well-diversified ETFs, their value should gradually rise over time, and the income they produce should also grow, helping to enhance your retirement years.
E-mail your questions to email@example.com. I’m not able to respond personally to e-mails but I choose certain questions to answer in my column.
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