If you haven't heard about tax free savings accounts yet then congratulations, you've made it out of your coma! This is a detailed account of what I've done with my TFSA. I'm sure there are better strategies out there but I spend a minimal amount of time on my tax-free trading account and it's doing very well.
Now I myself never realized the true potential that TFSAs offered back in 2009. I remember opening up a "savings" TFSA with my bank and they offered a 2.5% return. I kept my money in for almost a full year until I noticed that my interest rate of 2.5% was reduced to 1.5%. That was right around the time I started learning about dividend investing and then it hit me; if I opened a tax-free trading account, I could earn a lot more money without paying any tax.
The first business day of 2010 I transferred $10,000 into my newly created tax free trading account and purchased 200 shares of ENB. The next few days the stock price dropped and I thought the world was ending. My wife was furious with me but I fought the temptation to sell and naturally the stock recovered. Then one day in March my life changed forever; a dividend payment was deposited into my account for $85. A warm fuzzy feeling came over me when I made my money work for me instead of the other way around. From that day forward I became addicted to dividends.
By the end of 2010 the stock value in my tax free trading account increased by $1516 and I was paid $340 in dividends. That's a far cry from the $150 I would have been paid if it had still been in the crappy savings account from my bank. I noticed the interest rate from my original savings account was even further reduced to 1% while the yield in my tax free trading account increased from 3.5% to 4%. How did my yield increase while the banks were reducing their interest rates? It was all thanks to a little Christmas gift from Enbridge; they increased their dividend by 15% for March of 2011.
2011 was an interesting year for us. We had just purchased a new house and a lot of my funds were tied up paying two mortgages. I really wanted to contribute more money into my tax free trading account since the contribution room increased by another $5000. I had 100 shares of BCE in a cash trading account that I bought in 2011 and I was paying taxes on the dividends. If I stuck shares of BCE in my tax-free trading account I would deem them sold and pay taxes on the capital gains. It would only be small amount, less than $50 to be precise so I went with it and added my BCE shares into my tax-free trading account. My yield increased from 4% to 5.7% and the total dividend coming in each year increased from $340 to $599.
October is almost over now, and after the market dips of August and September and a looming economic uncertainty, my tax-free trading account is still doing amazingly well. I deposited a total of $13000 and my trading account is currently worth $18,900. Sure beats the $390 I would have made in that damn savings account I first opened.
From here on in I plan to maximize my TFSA with any contribution room I have left. I also would like to get my wife's TFSA maxed out as well, but that's not likely until her last student loan is paid off first. I will keep investing in quality Canadian blue chip stocks and re-invest the dividends to allow the maximum amount of compounding. I hope to get either a bank or some sort of consumer goods in my TFSA next, whichever gives the highest yield in the end. Hopefully when I plan to retire I will have created a self sufficient, tax-free income supply that will compliment my other retirement income. That is if the Federal government doesn't screw over my plan and change the TFSA rules on me.
What do you do with your TFSA?
7 comments:
Hey LB are you buying the new shares inside the TFSA? Withdrawing the div$ adds to your annual contribution room each year. You can buy the new shares outside and contribute them back in each Jan. We're retired and contributed an extra $3150 total to our TFSA's back in Jan. I'm curious to see if you can Drip stocks outside a TFSA and transfer the new shares into your TFSA periodically as part of your annual contribution. I don't think you could directly DRIP the shares inside your TFSA and still have it count to your contribution room. You might be able to do this strategy as you're young and have many years to build your portfolio up. We are tapping all our divs for income. My only other strategy now is to transfer as much of our taxable account holdings into our TFSA's as possible every January.This is where the monthly TFSA div withdrawals really helps. I'm guessing we'll be able to add approx $3500-3600 to our accts next Jan.
Anon: I'm buying the new shares with cash I will contribute and leaving the dividends in to re-invest unless they are needed for an emergency. If you buy stocks outside a TFSA, then transfer them into a TFSA, those stocks are deemed sold and you have to pay capital gains on them. Check out Taxtips.ca
http://www.taxtips.ca/personaltax/investing/transfersharestorrsp.htm
I have been investing in dividend paying stock since the 1970’s. What I have found, and which you will love, is that my dividend income has never decreased.
Yes, I had some stock that decreased their dividends in a recession. I have a diverse dividend paying stock portfolio and my overall dividend income has never decreased.
What happens in a recession is that my overall dividend income increases slow down. It does not happen right away, but it does happen. For example, the last recession was in 2008, but 2010 was my lowest dividend income increase year. Things are better in this year.
I look forward to many dividend increases over the years. I know I'm a little hesitant to invest in companies that cut their dividend when companies in the same sector did not.
I take a hard look at any company that cuts their dividends. The question is, do you sell, do you hold or do you buy more. Sometimes dividend paying companies are unduly punished when they cut their dividends.
What especially comes to mind is TransCanada in 1999 was severely punished for doing the right thing for long term viability of the company. Their dividend cutting was over punished and provided a good buying opportunity.
Susan, would you say Manulife is being punished now and is a good buy, or is it best left alone?
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