Weekend Reading: Bitcoin, CPP, and Dividends Edition
The price of bitcoin is surging again and recently surpassed all-time highs. That has brought all of the ‘crypto bros’ out of hibernation to gloat about bitcoin taking over the financial system (or whatever they think happens next).
Shares of NVIDIA Corp are also soaring to new heights. The semi-conductor company recently surpassed $2 trillion in market capitalization to become the third most valuable company in the world (behind Apple and Microsoft).
Surprisingly, shares in NVIDIA have performed even better than bitcoin over the past five-and-10-year periods. In fact, you would have had to own bitcoin in the very early days (2009-12) to have seen better performance than holding shares of NVIDIA stock.
But when I say this on social media, the crypto bros come out in full force telling me all the reasons why bitcoin is superior and investors should get in now before it’s too late.
Hey, at least NVIDIA actually makes and sells something useful.
I’m not one for speculating on assets with lottery-like properties. Usually by the time we hear about how great the investment is, most if not all of the upside has already been captured.
Unfortunately, we can’t go back in time and capture past returns from any stock, coin, real estate market, or any other asset class.
I say this to caution readers not to get caught up in the next speculative bubble, whether that’s AI or cryptocurrency or the next big thing.
CPP as an investment
Few topics are as divisive in Canada as the Canada Pension Plan. Business owners and self-employed individuals hate it for having to fork over both the employer and employee contributions. People who die early also don’t like CPP and accuse the whole program of theft.
Proponents of CPP say it helps the social safety net and acts as longevity insurance for those who live to a normal to above average life expectancy thanks to its guaranteed, paid-for-life, and indexed-to-inflation properties.
Ben Felix is a huge proponent and argues that CPP is one of the best retirement assets money can buy, despite what the skeptics say.
“The CPP benefit is an inflation-indexed annuity – the only true risk-free asset for a long-term investor.
This is an asset that hedges three of the most important risks that retirees face: longevity risk, inflation risk and sequence-of-returns risk. Inflation-indexed annuities are not available for sale privately in Canada.”
Felix also says a less appreciated aspect of CPP is that it allows investors to take more risk with their other financial assets, increasing their expected returns without increasing their chances of financial ruin.
But, oh the comments! What if I die at 65? Why can’t I opt-out and invest on my own? Business owners get screwed?
The reality:
“We should be happy to have an asset like CPP. Planning to get the most out of it is far more productive than griping about its existence.”
Dividends aren’t free
If you ever get tired of debating bitcoin bros and CPP cranks, there’s always the dividend delusionists.
For the record, I have no problem with dividends. They’re an important part of the stock market’s overall returns. I receive regular dividends from the 13,500+ stocks I own through the globally diversified VEQT (about half the companies pay a dividend).
But dividends are not magic. They’re not free. They get paid out from a company’s earnings, and that payment to shareholders reduces the value of the company by the exact amount of the dividend.
For some reason this is a concept that many dividend investors fail to understand. One such investor told me:
“Dividends come from earnings or free cash flow. Share price increases only come from someone being willing to pay more today for the same company than they did yesterday.”
I think this is a serious misunderstanding of how the stock market works, especially if you believe that word ‘free’ actually means free.
Investors pay higher prices because they expect higher future returns. Why would you invest in a company that you don’t believe will increase its value in the future?
Promo of the Week:
We enjoyed a week away in Cancun and took advantage of some of our American Express travel benefits on the way there and back.
First, we used the free night certificate that comes with the Marriott Bonvoy Card to stay at the Calgary Marriott in-terminal hotel the night before our early morning flight. This saved us from driving up from Lethbridge super early the day of the flight and made for a stress-free travel day.
At the airport we took advantage of the free lounge access that comes with our American Express Platinum cards. The cost of entry is generally $49 USD per person. We visited the lounge in Calgary and in Cancun, which would have cost us $392 USD or $532 CAD
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Sign-up for the American Express Business Gold Rewards Card here.
Weekend Reading:
The Globe & Mail’s Erica Alini says new tax rules have many Canadians in a bind. It’s hard to find an accountant and risky to DIY.
Tim Cestnick explains why spousal RRSPs still have a place in clever planning.
Why Canada’s former chief actuary says you should wait to take your CPP benefits (subs).
An age-old question for Canadians: Should you pay down your mortgage, or fund your RRSP?
Rob Carrick took a deep dive on the OAS clawback: How many people are affected, and how much does it cost them?
Ben Felix looks at home country bias and says it can reduce fees and taxes, it may hedge the cost of local consumption, and it reduces exposure to the potential mistreatment of foreign investors when times get tough:
Last month, for the first time, passively-managed funds controlled more assets than did their actively-managed competitors. Index funds have officially won.
Dare to compare your investment results with your colleagues and friends?
“When people talk about money, it’s like social media posts. They rarely share the bumps and bruises.”
These 15 funds managed to lose value for shareholders even during a generally bullish market.
Michael James on Money discusses private equity’s fantasy returns.
Finally, here’s Ben Carlson’s take on avoiding burnout and a mid-life crisis.
Have a great weekend, everyone!
“Few topics are as divisive in Canada as the Canada Pension Plan. Business owners and self-employed individuals hate it for having to fork over both the employer and employee contributions. People who die early also don’t like CPP and accuse the whole program of theft.”
Pretty sure those people don’t say anything because they’re DEAD, Robb. 😛
Good catch, lol
Ha! You’re right. That’s a statement from those who fear dying early (or have had friends, family, colleagues die early). But as Fred Vettese says, you’ll have bigger problems than not collecting CPP – like not breathing!
I agree that CPP is a great investment, both during working lives and retirement, and I have sometimes wished I could direct more investment into it! But now, it’s admittedly helping me through a Disability phase when I have no other income. Curious if you know how much going on CPP Disability during your working years affects how much you get at retirement. It often feels like the information out there for CPP Disability ignores people who still want to plan for retirement. Certainly the Government of Canada information on CPP impacts is extremely cryptic, or not there at all. They could definitely do a better job of conveying how it works when you get CPP Disability and eventually want CPP in retirement!
Hi Jennifer, thanks for your comment. It’s complicated – this article might help: https://retirehappy.ca/cpp-disability-benefit/
As would reaching out to the author Doug Runchey, who offers personalized CPP calculations on his website – https://www.drpensions.ca/
Have you any information regarding converting RRSP to RIF prior to age 70? As an example at age 65.
Yes, right here Steven: https://boomerandecho.com/weekend-reading-when-to-rrif-edition/
The CPP is a benefit to us individually, yes, but even more of a benefit to us as a population—we are agreeing to protect each other as we age. Without it, there would be an even greater percentage of seniors living in poverty, and that would increase pressure on our already-stressed health and housing systems.
I just wanted to say that I think this is a great way to look at it Erin, and I whole-heartedly agree. For every individual that might achieve a better outcome for themselves if they could opt out of CPP I have no doubt there would be many, many times more that would fail. I really like the take of looking at the population as a cohort.
Hi, dividend investors are not really concerned with market value of their large cap dividend growers. We are concerned with dividend income/safety, and dividend growth. The financial industry likes the fact that you continue to attempt your buy low, sell high game (been there), that’s what makes them money. It is possible to live off dividends very comfortably, and the stress levels are much lower than the capital growers who tend to worry about out-living their money in retirement. I guess I might not realize it, but as far as I can tell I’m not delusional, life is good and my income increases by 8 to 10% per year. No dividend cuts during the Covid downturn, so seems like a pretty safe strategy.
Hi Howard, living off the dividends is a fine strategy if your goal is to leave a large inheritance, limit your own spending in retirement, and have your distributions dictated by corporate boards (instead of withdrawing what you want when you want it).
Most retirees need to spend their capital to maintain their standard of living and the best way to do that is to take a total return approach to generating income.
The dividend growth strategy does have its drawbacks as you’ve pointed out Rob. Dividends can also be cut (I had owned Manulife last recession – ouch). However, I understand Howard’s view. These are usually large well-established companies, and diversifying of course helps. During those difficult times such as the GFC, I found this strategy helped me as an investor compared to some of the frantic postings by other investors I read on the internet when the markets had dropped fairly significantly.
Investors have different goals and different comfort levels. Heck, some retirees get an uncomfortable feeling about spending what they had saved during their careers. I think a dividend growth strategy may help those types.
I do admit to having slightly changed my portfolio over the last couple of years. I still have a good portion in dividend growth, but have added some international ETF’s, GIC’s and lower yielding / higher growth Canadian stocks. I also own a portion in gold (yeah, I know you’re not a fan 🙂 ) and a couple resource stocks – in case inflation gets out of control. I know they wouldn’t correlate exactly in that scenario, but there were points in the 70’s where they did. No guarantees going forward, but that is the best past reference that I see.
This is what works for me and my goals, provides me with “enough”, and helps me sleep at night in good times and bad. However, if there is such thing as that dreaded 100-year cycle (i.e. such as the Great Depression), then yeah, I might be sweating a little more along with everyone else !
Hi Robb, another nice and clean article. Two points looking for your thoughts.
1. Incorporated self-employed individuals may opt-out of CPP contributions. Given this, DIY invest rather than contributing 2x (employee and employer). Does the argument in favour of CPP then still hold true?
2. The government seems to want to ‘influence’ CPPIB and other ‘independent’ investment board decisions. Given this, plus the over immigration, aging population, flat GDP growth, only time will tell the state of CPP solvency.
https://www.theglobeandmail.com/amp/business/article-canada-pension-plan-invest-assets/
https://www.theglobeandmail.com/opinion/article-canada-is-no-longer-one-of-the-richest-nations-on-earth-country-after/
Hi Rick, thanks for your comment. Remember, the employer portion of your contributions are tax deductible. The argument is still sound for self-employed / small business owners.
Keep in mind this is coming from someone who is effectively opting out of CPP at the moment as a small business owner paying himself dividends instead of salary. It’s a decision I still wrestle with and may change in the future.
CPP is audited by an independent actuary every three years and is fiscally sound for the next 75+ years. Enhancements to CPP (increasing contributions) will only further solidify the program.
And, yes, our government would love to have our largest pension plans (CPP, OMERS, HOOPP, AIMCo) invest more in Canadian assets. And according to that article, the pension funds would love to do that as well, stating that if the risk reward trade-off is equal they would prefer to invest in Canada than elsewhere.
Fair enough – employer CPP contribution is a tax deductible expense however I still believe investing within a Corp through a DIY Corp Investment strategy would be better off and yield better outcomes. Not sure if you saw but CPP’s 2023 performance shows a meagre 1.3% return amid a booming 2023 stock market! Not sure what really goes on with CPPIB – like many other things happening here (eg. CBC lol), I see it as a black box/out of public mind/elitist management.
https://www.cppinvestments.com/wp-content/uploads/2023/10/CPP-Investments_F2023-Annual-Report.pdf?lid=cvbo717ctr3s
Rick, the 2023 performance was disappointing for sure, but their 10-year returns are a very solid 10% a year. I’ll give them a pass for a year.
Let’s not overlook that the quoted document is for fiscal 2023 which ends March 31, 2023. 1.3% for April 2022 to March 2023 is not terrible.
I very much expect the number we see for the subsequent 12 month period will be markedly different.
More reading from Dr. Norman Spector @nspector4
Forcing pension funds to invest in Canadian equities is an idea that seems merely terrible at first glance but, when you really dig into the details, turns out to be truly abysmal.
Dozens of top business leaders have signed a letter urging federal and provincial finance ministers to alter the rules governing pension funds in order to boost the amount that they invest in Canada. In 2000, they point out, publicly traded Canadian companies made up 28 per cent of the assets of domestic pension funds. Last year, that proportion fell to 4 per cent. And – to get to the nub of their concern – that decrease has increased the cost of capital for business.
The letter links that decline with Canada’s economic woes: gross domestic product per capita has fallen relative to the United States, and investment per worker excluding residential real estate is less than half of the U.S. amount.
The diagnosis of economic decay is entirely accurate, but their proposed cure would accelerate the rot by attempting to remedy the effects of overregulation, excessive government intervention and corporate subsidies with even more regulation, intervention and subsidy.
The letter remains studiously vague about how the government might prod pension funds into shifting dollars into Canada. But one option proposed by some of the signatories would require pension funds to set aside a “reserve” when investing abroad. It’s not quite a return to the era of formally capping foreign investment, but the result would be the same: trapping capital inside of Canada.
That would undoubtedly benefit domestic companies by artificially depressing the cost of capital, but Canadians would have to foot the bill for that subsidy. Pension benefits would be lower than they otherwise would have been, or contributions would be higher. Either way, the proposal would erode the retirement income of Canadians.
Lest there be any doubt, the Canada Pension Plan Investment Board has (inadvertently) been running a natural experiment. The board administers the assets of the base CPP and the enhanced CPP – the top-up pension plan launched in 2019 – separately. The enhanced CPP has a much greater Canadian weighting; the strategic portfolio framework envisions it with 44 per cent of assets in Canada compared with just 8 per cent for the much larger base CPP. (The actual weighting for each isn’t disclosed.)
And what has been the result of that natural experiment? As of the end of fiscal 2023, the base CPP had a five-year net return of 8 per cent. The enhanced CPP had a significantly lower net return of 5.6 per cent. Or to put it another way, the plan heavily weighted to Canada did only 70 per cent as well.
The letter’s signatories seem to think those sort of lower returns are an acceptable tradeoff in order to create a pool of cheap, subsidized capital. But the cost of those subsidies will have to be borne by ordinary Canadians.
The proposal is bad enough; the justification is worse. The letter’s signatories go on to make some dangerously wrongheaded assertions about Ottawa’s right to monkey with pension funds. “Without government sponsorship and considerable tax assistance, pension funds would not exist. Government has the right, responsibility, and obligation to regulate how this savings regime operates,” they write.
Before pursuing that line of argument much further, they may wish to think about the other entity that would not exist “without government sponsorship and considerable tax assistance”: the modern corporation. Do these corporate executives really want to see a precedent set for such aggressive intervention?
The federal Liberals have said they want to encourage pension funds to invest more of their assets in Canada. So far, the government appears to be sticking to inducements, including a consideration of removing the rule that prevents funds from owning more than 30 per cent of the voting shares of a Canadian corporation.
So, what can be done to bring more pension-fund investment back to Canada? The answer is – it’s the wrong question. The solution is to address the policies that are undermining the dynamism of the Canadian economy: an overabundance of regulations; arbitrary and often punitive taxation changes; and protectionist policies that shield too many sectors from the rigours of competition.
Another round of corporate subsidies, disguised as economic nationalism, won’t address those ills.
Hi Robb, I guess I’m going against the flow. I retired at 63 and started collecting my CPP right away. I don’t know how long I’d live after retirement, so I decided to start collecting for what I had contributed over 45 years of my working life.
I didn’t have a Benefit Pension Plan to rely on in retirement but I did have a Group RRSP Plan through the company I worked for. I converted that to RRIF to help me supplement my retirement income. I have invested all the converted funds into Canadian and US dividend paying, growth aristocrat stocks (50%) each. To me, the dividend payments I get are the rewards for ‘investing’
my money with these companies. Also they provide me financial rewards for waiting around when the stock prices are down. In short, they help me pay all the bills.
Hi Wes, you’ve got to do what’s best for you and make the best decision you can with the information you have at the time.
Delaying CPP is a financially “optimal” decision but only if you have enough other financial assets to meet your spending needs and you live to a normal life expectancy or beyond.
Man I might be a bit of a debbie downer but the entire conversation about OAS clawback irks me. The entire reason for the OAS is to support seniors who need it and not people who are trying to maximize government support when they don’t need it. I am hopeful to be in a position to not qualify for OAS is retirement and won’t lose out. That money isn’t for people like me who’ve been fortunate to work a well paying job, invested well and can retire early if I so chose. For those on the margins I get it, paying attention to when OAS clawback starts is smart but I think too many people consider OAS clawback a loss instead of just an acknowledgement that you have sufficent retirement income.
Same here, Pam. It’s the epitome of a first world privileged problem, and one that only seems to affect about 500,000 people (many of whom are likely still working).
Certainly there are planning opportunities to reduce or avoid a clawback for people on the margins as you say – perhaps someone that might incur a one-time capital gain, like from the sale of a rental property, could plan to sell before applying for OAS.
But otherwise I agree 100%
My uncle just informed me that CPP does not provide a survivors allowance to the spouse if you contributed for less than ten years. It also does not even provide the 2,500 death benefit for that spouse. His wife only collected two monthly cheques then suddenly passed away. Your 8 and a half years of contributions are not going to help your spouse. While I understand it contributes to the collective pot , that is a terrible blow to someone who just lost a spouse, facing many end of life expenses and was hoping for a fraction of something . Take it early.
I wanted to review two articles you suggested from the Globe & Mail. However, when I went on to read these articles, I was told I needed to have a subscription to the newspaper to read the articles. I ‘m not going to subscribe in order to read a couple of suggested articles. Therefore, is there another way to get these articles or just not try when you make suggestions for Globe & Mail reading?
Thanks