Somewhere in between the holiday shopping, decorating, baking, kid’s school pageants, and parties you should take a moment to think about any financial issues that could be taken care of before the end of December.
Related: A Monthly Financial Planning Checklist
Spousal RRSP
If you make annual contributions to a Spousal RRSP, make your deposit now. The holding period is three calendar years after the last contribution to be taxed in the spouse’s hands. E.g. If you make your final spousal contribution on December 31, 2010 your spouse can make a withdrawal in January, 2013 but if you leave it for just one more day to January 1, 2011 you will have to wait until January, 2014.
Capital Loss
If you are selling shares that have incurred a capital loss be aware that, for tax purposes, the disposition of the shares is the settlement date, which is three days after the trade date. If proper care is not taken, the transaction may not be settled until the new year and therefore not any use for your 2010 tax plan.
Related: How To Calculate Capital Gains And Adjusted Cost Base (ACB)
Income Trusts
By now you should have reviewed your income trust holdings, if any, to see if they are still a fit for your investment portfolio. Companies have until the end of the year to convert into regular corporations. Some have already converted to dividend stocks and most REITs are exempt from the new legislation. Notices of “special meetings” have been sent out to unit holders regarding their intentions.
Some will cut distributions, some will keep them the same and probably most will reduce their dividends by 20-30%, or more. Don’t just look at yields though. Depending on your objectives, your income trusts-turned corporations may still be attractive investments for the future.
Act Now
Don’t put off important financial decisions just because it’s a busy time of year. A few minutes of reviewing and acting on your particular situation at the end of the year can make a difference in your financial and tax gains and losses.
You can classify most personal finance bloggers into two categories. There are index investors and there are dividend investors. Sometimes they cross over, but for the most part you choose one or the other. I happen to fall in the category of dividend investor, and here are some reasons why:
The Search For The Perfect Portfolio
Investors who follow an index investing strategy, or a couch potato strategy do so because they want to achieve the same results as the overall stock or bond market while maintaining lower fees. They also like the passive approach of simply following the index rather than selecting individual stocks, mutual funds or ETFs. They call this a lazy investing approach where you can just “set it and forget it”.
The problem I see with this approach is not so much the theory behind it, but the practice. Most index investors have a portfolio consisting of more mutual funds and ETF’s than my portfolio of individual dividend stocks.
From Canadian small and large cap stocks, US equity, international growth, emerging markets, preferred shares, corporate bonds, government bonds, short term bonds, real return bonds, precious metals, and real estate, it seems that investors get caught up in trying to achieve the perfect asset allocation mix.
And then there is the re-balancing act that follows. Sometimes this takes place every quarter, twice a year, or at the very least annually. Index investors are constantly fine-tuning their asset mix to once again achieve the perfect balance.
In reality, does all of this diversification and re-balancing protect you in a bear market? Did the latest global crisis spare any one particular region, sector, or class enough limit your losses? Can you ever beat the market with index investing? Are you really investing passively when you have a dozen or more funds and are constantly re-balancing? What happens if the market crashes when you are reach your retirement age?
Why I Choose Canadian Dividend Growth Investing
Dividends are more reliable than capital appreciation. FTS raised their dividend for the 38th consecutive year. ENB increased their dividend for the 14th year in a row. Dividend reductions are rare events. Meanwhile, the last ten years have been described as a lost decade where the market has not reached it’s pre-2000 highs. Where will your returns be if you don’t have dividends?
There are only two dozen or so Canadian dividend growth stocks to follow. They represent a selection of financial, retail, utility, pipeline, communications, and transportation companies (some others). Pick one when it’s value priced and purchase a worthwhile amount. It’s not rocket science like some would have you believe. Use yield, P/E ratio, the Graham number to determine value. Here’s a website that does it for you – http://www.ndir.com/SI/strategy/tse60.d.shtml
The income provided by growing dividends will fund my retirement. My yield on cost this year was 6%. When I want to retire in 20 years the yield on cost will be double digits. That means beating the market with yield alone, not to mention any capital gains.
Speaking of capital gains, I don’t want to eat into my capital during retirement. My dividend income will have grown enough that when I’m ready to retire I won’t have to sell any stocks, I can just live off of the dividends. Dividends which are still growing each year, giving me an inflation adjusted annual income.
I want to live and retire in Canada. Foreign dividends are fully taxed, whereas Canadian dividends are taxed favourably outside of a registered account. Foreign investing also comes with currency risk.
Under-Diversification or Concentrated Holdings?
During the latest economic crisis many Canadian dividend paying stocks continued to pay their dividends, and some even increased their dividends (one notable exception was MFC). For the patient dividend growth investor this crisis was an opportunity of a lifetime to pick up new positions in these over-sold companies at incredible valuations.
Related: Using A Stock Screener To Find The Best Stocks
You can say that I am not diversified enough, but I would argue that investing in Canadian dividend growth stocks has outperformed every asset class over the last 15 years. Why would I want to put my money anywhere else?
I would like to point out that while I am extremely passionate about dividend growth investing, my advice to others is to find an investment approach that works for them and to stick with it for the long term. Chasing the latest fad every few years is guaranteed to be hazardous to your wealth.
My current MasterCard statement has a little notice in the top corner stating that if I only make the minimum payment on my bill, it will take about 18 months to pay off the credit card balance. This is on a balance of $165 and a relatively low interest rate of 5.99%. One and a half years!
My HBC rewards card balance of $210 will take 82 months (almost 7 years!!) to pay. I can’t even imagine how long it would take to pay off a substantial balance at the 18 -19% of most credit cards or, worse, up to 30% on retail store charge cards.
If you are currently holding a balance and continue to use your card when credit becomes available you are basically paying your future income to the credit card companies for decades to come. Here’s how to get out of credit card debt for good.
How To Get Out Of Credit Card Debt
It’s time to get serious about unsecured debt and resolve to do everything you can to get out of credit card debt as soon as possible. It may help to take a good look at all your statements together to see just where you stand. You may be shocked at the total.
On a sheet of paper, make a list of all your debts including loans and credit cards. From your statement, record the outstanding balances, the minimum payments and the interest rates. Add up these amounts to get your total indebtedness and how much you are paying each month. From the “minimum payment notice” figure out the exact date the card will be paid in full.
Are you shocked yet? Pick one credit card with the best features for you and cut up the rest. Be sure to call or write to the companies to cancel the accounts. Keep your sheet of paper on hand to keep the information visible, especially when you’re tempted to charge “just this one” small purchase.
Now, most debt counselors will advise you to apply any money you have in savings to the balance, and start paying off the card with the highest interest first. I have a different strategy. Unless your savings can pay off the debt in total (or a large portion), keep it intact.
Psychologically it feels better to have an amount in your asset column, and depleting it may not make much of a dent in the liabilities column. If you do have an unexpected expense such as the $140 I needed for a new furnace motor recently, you can use your cash rather than increasing the credit card debt further. Also, you are more likely to think twice before using your own money for a frivolous purchase.
My approach to getting out of credit card debt would be to put every dollar I could afford onto the smallest balance, regardless of the credit card interest rates. Again, psychologically, it gives you a boost to see one debt paid off and then an increased payment can be made on the next highest balance and so on, until everything is paid. Then, resolve to pay the balance in full every month.
If you like, you can make up a spreadsheet that shows how you are progressing. People who really put their minds (and funds) to it can be entirely credit card debt free in a relatively short period of time.
Take another look at the total monthly dollar amount required for credit card debt payments, then think about how you could use that money to save for a worthwhile purpose or future security instead. It’s an empowering feeling to get out of debt.