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    Since 2009, two Canadian sectors had proven to the world the Canadian market can provide strong dividend growth stocks. It’s not by luck that four out of the ten Best Canadian Dividend Stocks for the Next Decade come from these two sectors.

     

    Both sectors are quite similar on many fronts. They both oligopolies, this is a mature market, but natural growth is still available and federal laws protect them from other competitors (mind you, it has become less protected for telecoms in recent years). In my opinion, they are the backbone of dividend stocks in Canada and all dividend portfolios should contain at least one of these companies.

     

    However not everybody thinks the same way. Many investors believe the growth potential for both banks and telecoms is gone for the years to come. Let’s take a dive into both dividend worlds and see if there is still potential for a new buy.

     

    Canadian Telecoms

     

     canadian telecoms

    Besides Rogers, the other three telecoms beat the S&P TSX60 over the past five years. Here, I’m not counting the dividend, so you can add a good 4-5% in yield per year to each of them. This is also a lot more than what the TSX60 pays. Rogers has been struggling for about a year now but it was ahead of the index for almost the entire period.

     

    There have been many fears from investors with regards to the obvious Government desire of enabling foreign competitors to enter into the Canadian mobile market. All telecoms dropped like a rock after the possibility of Verizon (VZ) joining the market during the summer of 2013. Fortunately for Telus & company, Verizon preferred buying back its shares from Vodafone than entering a new market. Since then, we all know it’s only a matter of time before another big player enters the market and puts additional pressure on margins. This could be good for consumers but a lot less for telecom investors.

     

    BCE (BCE) recently decided to buy Bell Aliant (BA) its sister company. BA is money making machine that will support BCE’s dividend growth over time. Bell’s diversification strategy among TV & entertainment (they also bought Astral not so long ago) can help them face any potential competitors in the mobile industry. BCE recently invested $600M in customer service to compete with Telus and Rogers. It seems to have paid off since their customer service surveys are going up. TV services (Fibe) and their media segments continue to go well with the integration of Astral Media posting operating revenue growth of 40.7% in this segment. BCE is undervalued compared to Telus. With a dividend yield around 5%, this could be your chance of adding a strong blue chip to your portfolio. BCE is a BUY.

     

    Telus (T) seems to be the super powered dividend stock we all look for. Revenues, earnings and dividend payouts are up, what more do you want? Strong from a 5% revenue jump and an 8.9% EPS surge, Telus decided to keep its good habit of increasing its dividend as the next payout will be 11.8% bigger. Both wireless and wireline segments were very strong during this quarter. Telus recently announced a $1.3B investment in infrastructure in Quebec. Strong from its position in Western Canada, Telus is now attacking both Ontario and Quebec battling with Rogers, Bell and Quebecor. T is a BUY.

     

    Rogers (RCI.B) was once able to follow the highly competitive telecommunication train in Canada but it seems to lag behind Telus (TSE:T) and Bell (TSE:BCE) of late. After posting disappointing results during the entire year in 2013, Rogers is keeping this bad habit for the first quarter of the year with a drop in revenues by 2% and missing analysts’ expectations on both earnings and revenue targets. Analysts are worried about its high debt-to-equity ratio (2.997 vs Telus at 0.98 for example). An aggressive stock buyback program combined with an increasing dividend payout will continue to erode Rogers’ cash flow. Telus is also hitting Rogers’ markets very hard. If I had to buy a telecom in Canada, I would turn around to buy Telus instead of Rogers. RCI.B is a

     

     

    Canadian Banks

     

     canadian banks

    There are two main fears around the Canadian banks and they are closely related: the high concentration of many banks in the mortgage industry combined with the ridiculous debt level of the Canadian population. There are several overheating housing markets in major Canadian cities and we all agree Canadians can’t sustain a 165% debt level forever. This is another reason why the Bank of Canada is highly reluctant to increase interest rates and prefers to increase borrowing rules to limit access to properties.

     

    Nonetheless, I believe some banks have more options than others and still believe there is growth for them.

     

    National Bank (NA) is the smallest Canadian bank but shows very interesting growth potential. First, 38% of its revenues come from their market segment (e.g. trading). As long as we are in a bull market, NA can take advantage of this concentration. Since I believe we are in a long term bull run, this bank will definitely continue to show growth. It also aggressively acquires clientele in the private wealth management segment. This is also another growth generator for this company. NA is probably the bank that is the least affected by the overheating housing market. NA is a BUY.

     

    TD Bank (TD) has shown the strongest growth across Canadian banks for the past ten years (NA is very close but TD is a lot bigger). On top of being a leader in Canada, TD is also the most productive Canadian Bank (e.g. more earnings relative to its risk-weighted assets). Its earnings volatility is lower than its peers due to a smaller exposition to capital markets. Finally, TD has deployed a very lean structure into its branches which benefits greatly from their expansion in Quebec and the US. TD Bank it is now known as “America’s Most Convenient Bank”. They recently beat analysts’ estimates once again. Their lean structure gives them one of the best customer service SCOREs across Canada. TD is a BUY.

     

    Royal Bank (RY) is another bank that did very well in the US. Since 2008, it has benefitted from the crisis to grow outside Canada. It has also a very strong market segment generating about a third of its revenues. Royal Bank has shown very strong earnings beating analysts’ estimates on a regular basis. This is not an easy task right now considering Bay Street’s heavy appetite. RY obviously has a strong mortgage market share and this should be a concern for new investors in this stock. However, the largest bank in Canada has also one of the most solid balance sheet and it can better endure a lending crisis than its peers.

     

    I Don’t Think the Party is Over for Banks and Telecoms

     

    Telecoms have started to diversify their services in order to benefit from their strong wire and wireless phone segment as a cash cow to open their business in other industries. A similar movement is happening with banks going after specific niches to avoid being too much at risk with mortgages.

     

    This is why I believe both industries will continue to grow and pay solid dividends. I agree with you that the easy money is probably gone, but this is the case with most sectors at the moment anyways. For any Canadian dividend investors, an investment in banks and telecoms still remains a good play.

     

    Disclaimer: I hold shares of NA, BNS & T

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    All right, I must warn you; this is a little bit of a weird post. I’ve been thinking about this scenario for about two months now. Maybe it’s the sun beating on my head too hard, or maybe it’s just a funny thought that will evaporate into thin air in a few weeks. Or… maybe I’m really tired about this whole crazy lifestyle where you have to run from 5am in the morning till 10pm and hope to have a good weekend to recharge for the next week. Anyhow, I wanted to have your feedback on this crazy plan.

     

    Where I’m at right now

    But before I share my plan with you, I need to tell you where I am at in my life. I’m turning 33 this fall, married and have three kids (2, 7 and 9). I work for a big financial firm, making slightly over 100K per year with a fully funded pension plan. Technically, I have nothing to worry about as my financial future is well assured.

     

    My investments look like the following:

    $8,000 in a RESP (kids’ savings)

    $2,000 in a TFSA (Tax Free Savings Account)

    $52,000 in a RRSP (my RRSP + my wife’s)

    Total of $62,000

     

    If I sell everything I have (mostly my house! Lol!) and pay all my debts, I will have around $100,000 in cash. I’m not counting my pension plan in the equation as I wouldn’t be able to withdraw from this account.

     

    Yes… this is what I’m thinking; selling everything I have and change my life forever… After all, I’ve told all my friends I would retire at the age of 35… it’s about time to think of a plan! Lol!

     

    Selling Everything and Go Live in an RV

     

    By selling my house, I would have enough to buy a used RV big enough to meet my family’s needs. I don’t need much comfort or luxury as my dream would be to go across Canada, then the States and finally go down South and settle in Costa Rica.

     

    Living frugally, I could probably only use my website income to pay for my few bills. The best part is that I could work 3-4 hours a day on my website and increase this income month after month to eventually make a substantial income from my site and still have very small expenses.

     

    I’m not too excited about living in an RV to be honest, but I’m really into hiking and travelling. This year, I went to Hawaii for 10 days and all we did was drive across the island, hike and look at paradise in front of us.

     

    The Plan

     

    It’s far from being a well-designed plan so far as I’m just thinking of it while writing this post! I’m thinking of doing this in maybe 2 years. This would give me enough time to save more income and put it aside for my project.

     

    I would use a 50K investment account to sustain this new lifestyle in addition to my website income. With 50K, I could generate additional dividend income (maybe $100-$150 per month) without touching my capital. I hope to avoid touching my RRSP account as any withdrawal would be taxable. Starting next year, I might consider investing 5K/year in my TFSA instead of my traditional RRSP contribution. This would help me to fund the 50K I will need.

     

    If I could setup my RV with 50K, there will be another 50K to invest. This would be the best case scenario; I would have 100K invested in dividend stocks on top of my retirement account. The more I write about this project, the more I get excited.

     

    I know my kids can do school at home with my wife and I. They would benefit from an amazing experience to learn history and geography on the ground; they will speak 3 languages (we already speak French) and they will learn to adapt to anything in life.

     

    What do you think of this first draft?

     

    Do you think I’m crazy or do you think it’s something that is feasible? I’m really looking forward your thoughts on this!

     

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    This article idea came to mind after discussing with one of my readers. His questions looked like this:

    “I’ve heard I need about a million dollars to generate a $40,000 income at retirement”

     

    There are lots of rules of thumb surrounding retirement. You need to generate 70% of your job income at retirement. You should consider a 4% withdraw rate. You should invest differently (safer investments) now that you are retired. You should always save at least 10% of your income to retire happy. The average rate of return of a stock portfolio should be 8-10%. Which ones of these rules are right or wrong?

     

    In my opinion; they are all wrong. Why? Because none of them applies to everybody. Back to my readers question; do you need a million bucks to retire?

     

    Yes & No

     

    Yes; if you have a million bucks saved and you withdraw 4% each year ($40,000), chances are you will be able to withdraw forever. However, the real question is: is $40,000 is enough to support your lifestyle and how are you going to deal with inflation? $40,000 today may be enough to support your lifestyle, but 20 years from now, you may need $60,000-$70,000 to support the same lifestyle. How does this translate in your retirement plan? Will the million dollars support it?

     

    No; You don’t need a million dollar to generate $40,000 in retirement income. If you have $800,000 generating a 4% dividend yield, you get your $40,000. Over time, building an 800K portfolio paying a 4% dividend yield is fairly reasonable. Many stocks pay around 3 to 3.50% right now and will increase their payout fast enough to reach 4% in a few years.

     

    One more point to consider is you might want to benefit from all those years of saving money and spend more along the way. After all, it’s your money. Therefore, you can take money from your capital and decrease your 800K or $1M nest egg. I don’t advise you take all your money out of your account and start living like a villain. I think the right move to make when you do know how much you can withdraw would be to get a financial plan from… a financial planner!

     

    Here’s How Dividend Investing Can Help You

     

    As opposed to many other way of investing, dividend investing seems to be the one that is the most aligned with a retiree’s way of living. Once you retire, you can’t count on that comfortable bi-weekly paycheck to pay the bills. You can’t really count on the amount of Gov’t pension you will receive to sustain your lifestyle (unless you like ramen noodles for lunch and spam for dinner!).

     

    If you are super lucky, you will have a fully funded pension plan from a big company (or by the government!). But it isn’t likely to be the case as most companies are cutting down on their generous pension plans and leaning toward a contribution defined pension plan. Meaning that you have to save money in a retirement account and your employer helps you with an additional contribution. However, once you leave, you get “your doggy bag” and you are in control. You can spend as much as you want but once the bag is empty, you can’t go back to your employer to ask for more.

     

    The most reliable source of income for an investor is the dividends paid. It’s better than the interest on bonds for two reasons; most bonds pay every 6 months and the interest paid is fully taxed in a non-registered account. On the other hand, you can find dividend stocks paying out quarterly or even monthly. You can create a dividend calendar and manage your portfolio to hold enough stocks to receive dividend payments each month from one company or another.

     

    If you are able to live on the dividend distribution only, dividend investing will also protect your lifestyle from inflation. Most dividend stocks I pick increase their dividend by 5% or more each year. Inflation should be around 2 – 2.25% for the upcoming years. The dividend increase will not only cover inflation but will actually increase your buying power.

     

    What is your next step?

     

    If you are about to leave for retirement and you have never invested in dividend stocks before, you need help to get started. You can deal with a financial planner that will help you with a detailed plan for retirement. You will either have to pay slightly over $1,000 for this plan with a fee only planner (this means he won’t sell you anything) or you can go with a regular financial planner for a free plan but he will want you to buy funds with him (everybody has to make a living, right?).

     

    The other option you have is to start on your own. This is one of the reasons I’ve created Dividend Stocks Rocks; to help retirees managing their portfolio. We now have 12 real life portfolios to help you build yours along with stock lists and an exclusive ranking system. The bi-weekly newsletter is exactly what you need to keep on top of everything and without having to worry about potential crashes.

     

    Back to Our Question – How Much Do You Need to Retire?

     

    As you can see, the answer is not universal; I know people that have retired and project total revenue in the range of $24K-$30K per year. They live simply, have no debts and don’t need more to be happy. Others will need over $50K annually before considering retirement. It’s all about knowing how much you need.

     

    One thing is for sure, you have to consider living up to 90-95. In my opinion, out surviving your savings is probably the worst case scenario you can have as a retiree. In order to reach 95 with enough money in your bank account, you will probably need to retire around 67-70 and have around $1M in savings. But it doesn’t have to be $1M in cash in an investment account; it could be a combination of many things; a pension plan, a rental property or even your own property (if free of debts) so you can sell your assets and continue to live your retirement dream.

     

    My personal plan is to retire around the age of 55, maybe 60. I’ll have a pension plan that will jump in at the age of 65 and in between, I count on my retirement account (dividend investing!) to sustain my lifestyle. I expect to have around 450K at the age of 60 in my RRSP account along with a fully paid house and pension plan. Therefore, at the age of 60, I will have over $1M in value (my pension plan alone will be close to $800K at that time), so I can retire comfortably.

     

    Have you ever thought on how much do you need to retire? What’s your magic number?

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