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It's been quite a journey the past two years as I've learned about stocks, technical analysis, swing trading, and finally; dividend growth investing. For 17 years, I home educated our children and tutored, while my husband supported the family. Once I worked myself out of that job, I had to... More
  • Portfolio New Year's Resolutions

    Since it is the New Year, and I have analyzed my portfolio from a variety of angles, it is time to set some direction and objectives for the new investing year.

    I already have the broad goals for my portfolio and a strategy already in place. But are there any new resolutions I can implement to continue building a strong, diversified portfolio so that when the winds of market change blow in, I will be confident to stay the course? How can I better follow my plan?

    1. Trade Half As Much.

    This past year I transitioned from swing trader to long term dividend-growth investor, with a side of value and growth. I moved from holding a dozen companies to having the skeleton of a diversified portfolio with thirty. In the end, some of those early purchases were less quality, and were sold and replaced. This year I expect to make about twenty-five purchases and only a handful of sells, approximately half of what I did this past year. In this first full DGI year, I gave myself latitude, but this year I will not be lining my broker's pockets with my carefully saved funds.

    2. Do Not Try to Time the Market.

    In the past I spent time, energy. and trading fees gaming my portfolio, selling at tops to buy back on dips. I gained a little ground most of the time, but this year I have learned that though it seems an intelligent strategy, it is wasteful of that time, energy and trading fees.

    3. Careful Due Diligence.

    Instead, I will put my energy into more thorough and careful due diligence and confidently acquire, over several purchases, partnerships with quality companies that will help me meet my long term goals.

    4. Consider Allocation and Portfolio Fit.

    Once the companies have been scrutinized for quality, I want to be sure they fit nicely with what is already long-term core holdings within the portfolio. I plan to continue to be further diversified by sector, nationalities, risk, sectors and dividends. I need to be more careful to not overload any one sector, just because it seems like a good value or profitable trade, as I did with financials this year.

    5. Don't Invest Based on the Past.

    Past performance does not guarantee future returns. It is important not to invest looking backwards, but instead look ahead to your goals and needs.

    6. Weed out the Companies in Which I am Not Confident.

    There is still work to do on the portfolio. It is important to identify quality companies, do the due diligence to ensure confidence in a lasting partnership, considering allocation and portfolio fit, but it is time to contemplate weeding out some of the temporary companies that are still hanging on.

    7. Monitor Tax Impact.

    As I am increasingly more aware of the tax implications of investing actions, especially in regards to asset location, I want to ensure I am making the best strategic use of specialized tax benefits of certain types of accounts.

    8. Read More Books.

    This past year I read only a handful of books on investing, in addition to spend endless profitable hours reading here on Seeking Alpha. The books helped me to take a larger view of investing, building a portfolio, not just buying stocks. I need to keep that expansive perspective as I continue to develop my investing proficiency. Additionally, I learned more about specific concepts, while Seeking Alpha focuses more specifically on stocks. I will not be cutting down my SA time, but my intention is to read more books this year.

    What are your New Year's Resolutions regarding your portfolio?

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Jan 06 10:19 AM | Link | 3 Comments
  • Newbie's Lessons: Using The Right Account To Minimize Taxes

    One of the biggest, indirect erosions of our investment dollars is taxes. Another is inflation. We can't control inflation, but using the correct type of account for your age and tax situation is something we can easily control, often with substantial tax benefits.

    I'm not a financial advisor, and have only been investing for a relatively short time. I've made mistakes and learned from them, and I hope I can save you the same. Discussions on the different types of accounts and how to use them more effectively are rare, yet it is of primary importance to new investors trying to set up their new portfolio.

    As a Canadian, I'm going to discuss RRSP's (Registered Retirement Savings Plan, aka RSP's) which are akin to the American 401k's, and TFSA's (Tax Free Savings Accounts) which have many similarities to Roth IRA's, and Open accounts (regular, non-registered, taxable accounts). Though we lived in the States for nearly 4 years, I wasn't particularly interested in investing at that point and didn't learn the specific details of the American equivalents of our accounts, so please do your own due diligence. Though the details may vary, the fundamental structure and principles of effectively using different types of accounts are there. There are also many other types of accounts (RESP's, RDSP's, LIRA's) that are either variants, situation specific, out of the scope of my experience, or not useful for the average retail investor saving for retirement, so this article is only about the original three.

    My primary goal, and the only purpose of my investing is to be able to afford to retire at a reasonable age (65-ish) and hopefully to be able to live off the dividends and income from those investments without needing to spend down the principle. We've recently become empty-nesters, losing all of the tax benefits children provide, while at the same time had an increase in income. With no company pensions available, we are reliant on our savings for our retirement. Because of this, using the right account to minimize taxes has become very important for me, personally.

    Main Differences, Benefits, and Limits for RSPs (401k's) and TFSA's (Roth IRA's)

    There is much confusion, especially for young people, over whether to add money to their RSP (401k) or TFSA (Roth IRA). Both RSPs and TFSA's are registered accounts with their own rules, benefits, and drawbacks.

    First off, if you have a matching company retirement account, match it to the maximum benefit possible. Don't miss out on free money, if it's available to you! Signing up for the company matching plan is how most young people begin to think about investing.

    The main difference between RSP's and TFSA's are that RSP's are pre-tax dollars and TFSA's are post-tax dollars. The main bonus for the RSP is the tax benefit, receiving the tax already paid on the contributions back on your tax return. The benefit is equal to the percentage of your tax bracket. The main bonus for the TFSA is that the earnings on the contributions are tax exempt. Another benefit to the TFSA is that the funds stay available for use, if necessary, without the complicated rules, penalties and taxes, that accompany withdrawing funds, allowed for only a few specific reasons, from your RSP. However, easy access to funds may also be a drawback to the TFSA as a retirement fund strategy, if easy access to the funds designated for retirement is a temptation.

    Both accounts have contribution limits. For the RSP, the contribution limit equals 18% of your annual income. Unused contribution room carries forward, but is not replaced if the funds are withdrawn. In the TFSA, your limit is $5000 for each year after you turn 18 years old, from 2009-2012, and for this (2013) and the next few years, the limit has increased to $5500. So, anyone over 21 currently (2014) has a total contribution limit of $31,000. If money is withdrawn, it can be re-contributed beginning in the following calendar year. There are no restrictions on why money can be withdrawn. Taxes need to be paid on withdrawals from RSPs, but since TFSA's are post-tax, the tax has already been paid on the contribution, and the earnings are tax free, so no tax is due on withdrawals at any time. One can move money from an TFSA to an RSP without penalty, but not the other way around. RSP's can be more limiting, and once the money is in, it's more difficult and costly to access.

    Age Matters

    The younger you are the more obvious the choice between contributing to an RSP or TFSA. Someone in their 20's may see their contributions to the TFSA grow by more than five times over the years, and that represents a lot of tax savings by retirement. In an RSP the contributions are tax deductible, but the withdrawals in retirement are taxable. In reality, RSP's are not tax-free, just postponing the taxes to a time when, hopefully, you will be in a lower tax bracket.

    If you are already in the lowest tax bracket, putting money in an RSP is not particularly beneficial. Sure, you will get money back on your tax return, but you may end up paying more tax on that money later. It really only becomes valuable to contribute to an RSP when your tax bill becomes more significant.

    Creating a Windfall

    So, now that you've endured a description of accounts you probably already own and know about, I'm finally getting to the point of the article. How can individual investors use these accounts to their best advantage?

    Two years ago, when I first began managing our investments, we opened our first TFSA's. I squirreled away as much as I could and was pleased with the results at the end of the year, but it didn't do anything for that year's tax bill. This year I've ignored the TFSA's and squirreled away into the RSP in order to receive a tax refund. In the last week of the year, I emptied the TFSA's and dumped the funds into the RSP. This will give us a hefty tax refund, which, because the withdrawal was made before the end of the year, can be dumped right back into the TFSA's to grow tax-free again. This created a nice tidy windfall to be added to our portfolio this year, more than doubling the contributions we were able to make on our own.

    In a way, I'm borrowing from the government to invest. But I'm not exactly sure I did the right thing. By the way, be careful that you actually have the contribution room available as the penalties can be significant.

    This coming year, my plan is even further refined. I plan to contribute as much as possible to the TFSA's so that the funds have the year to grow, before some of it will be transferred to the RSP at the end of the year to generate a tax refund, to then deposit the funds the TFSA's to do it all again. The big question is about the 'some of the funds'. How much should I be contributing to the RSP to maximize tax savings, but not create an unbearable tax situation in retirement? Also one does not want to deplete the TFSA's, but keep them as filled as possible in order to have as much money as possible growing tax free.

    Transfers from TFSA's or Open accounts to RSP's can be made in cash or "in kind', negating the need for selling and repurchasing securities, as long as the account holder is the same on both accounts. To transfer from my TFSA to my husbands RSP, I need to sell the security, transfer the cash to a joint or holding account and then contribute the cash to his RSP and repurchase the security. I don't intend on doing that again!

    Another thing I won't do again is hold foreign dividend-paying securities in the TFSA. In my case, Ford Motor (F) started paying a dividend. Withholding tax is taken right off the dividends before they reach the account and unfortunately, in a TFSA this tax is not recoverable. No withholding tax is taken when the stock is held in an RSP, and you can claim on your taxes the withholding taxes paid in an Open account (see below). At any rate, I simply won't hold any foreign securities in my TFSA again.

    Open Accounts & Tax Saving Strategies Within Them.

    Open or Non-Registered investment accounts have no super-powers. They are simply filled with money you've saved and the growth on those savings is considered income, and therefore taxable. There are, however, a few strategies that make them worth considering.

    The special tax status of dividends and the Canadian Dividend Tax Credit is a great reason to hold dividend paying stocks in a taxable account. Since the corporation issuing the dividends has already paid taxes on the earnings before doling them out to the shareholders, both the federal and provincial government gives the individual shareholder a credit based on an average estimate of taxes paid by the corporation for their own taxes. If you or your spouse's income is low or primarily made up of dividends, the Dividend Tax Credit can even lower your income tax payable. Sadly, the Dividend Tax Credit has been lowered again for 2012, but it still provides significant savings.

    Tax loss selling is talked about in the media throughout December and can be a good strategy to save on taxes. Selling your biggest loser stock and locking in those losses can directly offset any capital gains you have. You cannot repurchase those shares until 30 days later or you forfeit the capital loss. Even capital gains tax, which is your regular tax percentage paid on only half of the gain you have, is better than tax on regular earned income.

    Did you know you can donate securities to charity instead of cash? This has to be specially arranged before you make a sale, but apparently isn't as complicated as it sounds. You do not pay taxes on stocks with capital gains that have been donated to a charity, yet receive a valuable donation receipt for the full amount of the sell value of the security. I hope to be able to do this in the future.

    I haven't opened a taxable account yet, as I previously thought it would be a last resort account, to be used after all our RSP and TFSA contribution room has been used up. So this section comes without the benefit of personal experience, but is something I'm eager to research and understand more fully.

    Any withholding tax paid in an Open account can be claimed on your taxes (foreign income and the corresponding foreign tax paid) and will directly reduce taxes owing or generate more of a refund.

    Donating the largest gaining stock each year to a charity, selling the worst performer for a tax loss to offset capital gains, and fully investing taxable accounts in the highest yielding of our dividend paying stocks may lower our investment taxes provide benefits for using open taxable accounts.

    I'm still wrestling with these questions:

    Is it more beneficial to contribute to RSP's (401k's) now, using my windfall strategy, and have the tax return money as principle to invest now and earn money with? Or is it better to pay taxes now, invest our savings only in either TFSA's (Roth IRA's) and Open accounts, doing the best to minimize taxes by the dividend tax credit, tax loss selling, and gifting shares?

    The questions continue: Is there an approximate age range when paying the taxes first is decidedly better? It seems obvious that the TFSA and Open account strategy is best for young people with long time horizons before their incomes generate significant taxes. But does that work for a 45 year old who pays a good chunk of tax?

    Would it be better to take out an RSP loan to maximize those contributions, generating an even larger tax refund, which mainly delays the tax until retirement when we are likely to be in a lower tax bracket? Many financial advisors will offer this suggestion and banks are very willing to entice you to take out an RSP loan, and I'm sure there are times when it's a helpful suggestion. However, I'm quite certain this is not the answer for our situation. The value of this may depends on the difference between your working years tax bracket and your expected tax bracket in retirement and what other kinds of tax credits you currently have.

    Another possibility is to "maximize" contributions to the RSP account. The term "maximize" refers to the amount at which the contributions to the RSP generate the identical amount as a tax refund. It's a smaller version of the 'windfall' approach above. This requires actually doing our taxes or a pretty accurate mock-up by mid February to be sure you can make a "first 60 days" contribution in the correct amount.

    Another approach I am considering, also requiring early tax preparation, is taking into account our "marginal" tax rate and comparing it to the lowest tax bracket (15%). If our regular tax credits (the most significant currently being the RSP contributions, and our charitable giving) decrease our marginal tax rate to something reasonably comparable (under 20%) then the lack of difference between the two rates confirms it is not really worth contributing more to the RSP, but rather paying the tax now. If the marginal tax rate is over 20%, the spread is worth capturing with an RSP contribution to lower it to 15%. With the current tax code allowing income splitting, and the fact we don't have any pensions, and will need to live off our savings and investments, we will likely remain in the lowest tax bracket in retirement. Growing the RSP account too much not only causes taxes in retirement, but higher taxes for future beneficiaries. It would be better to not chase sizeable tax refunds with RSP contributions for too many years, but simply leave the money in TFSA's and Open accounts.

    I still don't know the answers yet, but I have almost a year to puzzle it all out. I plan to have a firm, well-educated, and back-tested strategy in place before December 15, 2013. From this standpoint it looks like filling the TFSA's first, and then combining the last two approaches above (maximizing and comparing to marginal tax rate) will give me the best amount to contribute the RSP account.


    As soon as the TFSA's are full again this year, I will begin to contribute to an Open account. Before the end of the year, I will do a tax mock-up giving me an approximate maximized amount of RSP contributions, along with our marginal tax rate. Based on those numbers, I will transfer from the Open account first, then the remainder from the TFSA the amount that brings our marginal tax rate to below 20%, as long as that number remains below the 'maximized' RSP amount which will be used as the ceiling. The only reason to do the mock-up before the end of the year is to make sure the withdrawals from the TFSA are in this calendar year, so the funds can be immediately be replaced into the TFSA as soon as possible the following year. If the Open account contains enough funds, selling a losing position to create a tax loss before the end of the year, and contributing them to the RRSP, will do double duty in the tax minimizing approach.

    What do you think of this strategy? Is there anything you would do different? How do you use the different types of accounts as a tax saving strategy?

    Disclosure: I am long F.

    May 03 10:10 PM | Link | 2 Comments
  • Freedom 65: Goals And Strategy

    It has been less than two years since I purchased my first shares in Ford Motor (F) and nearly a year since I have been learning here at Seeking Alpha. I began this journey in investing when an advisor left us with less than 10% of our 22 years of retirement savings. With no company pension waiting in the wings, I was attempting to salvage the shattered dreams of the comfortable, but modest, retirement we had always been told we could easily afford. There was no possibility for a comfortable retirement anymore, but I could at least try my best to manage well what we could squirrel away, and began to voraciously read and learn.

    The feeling of never being able to afford to retire lasted as we watched the portfolio go down another 10% while the market went down 12%, in 2011. To clarify, the portfolio value doubled, as we added funds, but the ROI was negative. But my husband encouraged me to keep learning and trying for "just one more year". A higher-paying job, and the lower expenses of an empty-nest helped us to add funds faster. But the biggest factors, the articles here on SA and the time to process it all has resulted in a total turnaround.

    At first I was swing-trading, with only moderate success, but soon after being introduced to Seeking Alpha, I discovered dividend growth investing and everything has changed. When I first read about living off dividends in retirement, I harrumphed and thought that could never be possible for us. But I kept reading and learning. It took quite a while to believe we could afford to retire at all without taking high levels of risk, and that the steady, practically boring, DGI names could really take us where we wanted to go. The SWAN (sleep well at night) element of this approach kept attracting me and I experienced success with a few commonly recommended DGI names. The stress gradually subsided and I kept reading.

    Freedom 65? Is it really possible? Even for us? Could we really retire at a typical age, even if we had to start basically all over again at age 42? It is only in recent months that I have truly believed we could possibly have enough to retire on. I finally proved it to myself, by taking the amount we currently have now, adding in the contributions we plan to make each year, plus a 4% dividend amount, plus 6% share price growth rates. The spreadsheet compounds it quarterly over the next 21 years (when we reach 65). The numbers say it's possible, but it has taken longer for me to truly believe this can actually apply to us as well. We will really be able to retire and live off the dividends, if we consistently add the planned amount of contributions, earn 4% in dividends, and have annual share price growth of at least 6%. If we mess up and don't add the planned contributions, or share price does not grow, or dividends are not earned, we will face difficulties. But I'm beginning to believe that these are attainable goals, without requiring a significant risk profile.

    Replace employment income in retirement passively via dividend income, enough to survive, maintaining our modest lifestyle, so that we do not need to spend the principle of our investments, so that we don't run out of funds and are able to pass on our tidy little nest egg to our children to do the same with.

    Portfolio Strategy
    1. Keep Saving
    Articles here wisely discuss living within your means and savings as a fundamental hurdle to being able to invest. The funds we are and plan to contribute to our retirement nest egg are significant and face some substantial headwinds. i.e.. last year's trip to visit our daughter who lived in Europe, and a trip to visit my aging grandmother who has since passed away. Some things really are worth it, but it is easily possible we will be unable to meet our retirement goals, if we don't remain diligent to save.

    2. Create a Windfall
    Since we have had a substantial detrimental cash drain to our retirement fund with disastrous consequences, substantial cash bonuses to our retirement fund in the future could have equally, but beneficial, consequences! The problem, of course, is how to create a windfall! We are actively implementing two plans.
    Since a home is often the largest portion of a family's assets at retirement, and ours will be owned outright by then, we thought having another paid for by someone else might be a good idea, so we bought a rental property and are planning for at least one more. We're expecting that in 10-15 years this will create a nice injection of cash when it is sold, which will be used to purchase dividend growth stocks. We don't plan on necessarily keeping the rental property until retirement for income in retirement but, like a stock, plan on selling if there's a 'run-up' in price. As the property is currently self-sufficient, and rented reliably by one of our children, the risks are minimized.

    Another way we are creating a windfall is to move funds, at the end of the year, from the TFSA (Roth IRA) accounts into RSP accounts (401K's) which includes being able to move stock without selling/buying via direct transfer. This will create a substantial tax refund which can then be dropped into the TFSA's to purchase more stock which can grow tax free until the end of the year when we can do the same again (and again and again), doubling the amount of those contributions each year. In a way, it is like borrowing our own tax money from the government to invest. I transferred from the TFSA during the last week of the year, so that the full TFSA contribution room becomes available again immediately in the new year.

    This will create a tax bill in retirement, so beware of implementing this strategy excessively, but I will be careful not to move us beyond the lowest tax bracket in retirement, which shouldn't be too difficult! Without company pensions, it is easy to estimate our future tax situation, which will be primarily based on the portfolio I am building.

    3. Manage Taxes
    Another significant hurdle is taxes. Now that we have become empty nesters, and at the same time had an increase in income, many of our previous tax benefits have vanished. Taxes erode earnings and can make the job of saving much more difficult. Taxes are our family's single largest annual expense (followed by mortgage and insurance). Reducing that is of primary importance. Last fall, I invested time, energy and a few hundred dollars in an extensive tax preparation course which has been very enlightening. Properly sheltering investments in non-taxable accounts. using the above strategy with TFSA/RSP (Roth IRA/401k) contributions, charitable donations of winning stocks from taxable accounts instead of cash, tax loss selling, learning to maximize dividend tax credits, and claiming all benefits one qualifies for, as well as not paying someone to prepare our family's complicated taxes has this course saving multiple times its cost each and every year. Remarkably, the course itself provides enough education credits to pay for two-thirds of itself immediately. It's been one of my best investments this year, and we will reap the benefits year after year. As an added bonus, I have yet another part-time job for the tax season. It's been win-win-win all around! I wish someone had recommended it to me several years ago.

    4. Grow Dividends
    I have learned there is a big difference between dividend stocks and dividend growth stocks. The dividend growth stocks will have you far ahead, especially when the finish line is 21 years away. It does not take many years of a dividend not growing to make a smaller dividend percentage that grows reliably a much more valuable investment. I now keep my eye on the YOY dividend growth percentage when picking stocks. Also, stocks without dividends are far less attractive than they used to be.

    5. Grow Total Portfolio Value
    I know the pure DGI people are going to jump all over including growing "Total Portfolio Value", but just hear me out first. We cannot currently live for a month on the current annual dividends I earn and stocks yielding 90% are pretty hard to come by! In order to exclusively live off our dividends, I must grow the portfolio's total value (by over 20 times in 21 years. Thank goodness for the amazing properties of compounding!) by several means before we reach retirement. Obviously, as previously demonstrated, there must be continued contributions, a few windfalls, tax sheltering, reinvested and growing dividends which all lead to total portfolio growth and therefore dividend growth. Dividend growth IS is the whole point, but our goal cannot happen without concurrent total portfolio growth. Total portfolio growth will matter less as less as we approach living off of the dividends and it will not matter whatsoever once we are living exclusively on the dividends. But at this point, it's an critical factor. If, as my spreadsheet demonstrated to me, my average portfolio growth is less than 6%, we will not be able to retire at age 65 or not be able to live off the dividends alone. The more growth my portfolio shows, the more comfortable and generous our retirement will be. I fully acknowledge that a pure DGI portfolio also naturally includes portfolio growth, and probably more than enough to provide the minimums required.

    6. Diversification
    Diversification is another factor I need to address. I need to continue to further invest in a wider variety of DGI stocks and make sure those dividends continue to grow. At this point, I simply own too few to be safe, but I have doubled the number in the last six months up to a dozen, with a goal of twenty-five by the end of this year. Should diversification include stocks beyond dividend growth stocks? I foresee that this is something that will change as we move closer towards retirement age. For now, though, if I run into some compelling growth or value plays which I firmly believe will be beneficial, my personal portfolio theory allows this. But as we grow closer to retirement, these will be far less compelling, in favor of preserving capital and growing dividends and a reliable income stream, over total portfolio growth.
    As my spreadsheet shows, I now have target amounts of dividends expected each quarter, as well as target amounts of growth expected each year. Having had no experience in dealing with any of these targets yet, I only have others' guidance to go on and a small amount of backtesting. If the 6% growth target is more than met by the much larger DGI majority of my portfolio (which also provides the 4% dividends) on a regular basis, why would I take unnecessary risk to grow total portfolio growth? However, if it is not met, why would I not participate in a carefully chosen growth or value play in order to shore up total value?

    7. Hands on Management
    Another way to add to total portfolio value is to employ more hands-on management approaches to the dividend portfolio. I could sell overvalued names and wait for pullbacks to repurchase the same equity, (keeping in mind the ex-dividend date), which increases the numbers of shares, thus increasing dividends (and therefore total portfolio value). I have employed this strategy effectively with Keyera (TSE:KEY) this year, gaining an enviable yield-on-cost for the future. Selling parts of overweight positions to diversify into other stocks with a higher yield, or higher percentage annual dividend growth, or the same yield with a likely higher share price growth, within the dividend growth circle, will also grow my portfolio. I reluctantly sold half of an extremely overweight position in Enbridge (ENB) recently to purchase other DGI names. This still leaves me with a substantially overweight position, but one I'm more comfortable with, at least for the time being.

    My portfolio strategy this year: careful saving, creating windfalls, managing taxes, growing dividends and total portfolio growth, diversification, and continuing to actively manage.

    I just want to say one more thank-you to the contributors here at Seeking Alpha. Without your assistance and encouragement, I would not still be doing this. Our goal, which still feels a bit like a dream, would never be realized. I have been able to dramatically increase our total portfolio value for each of the last 2 years using the above strategies. The biggest gift has been the security of knowing that there is the possibility of a retirement future for us again.

    The numbers don't lie. Freedom 65 is truly a possible reality for us. Maybe it can be for you, too.

    Disclosure: I am long F, ENB, OTC:KEYUF.

    Jan 28 5:10 PM | Link | Comment!
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