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Discussion Starter · #1 ·
Trying to clarify something from you experts. I hear quite a few people who are dividend investors that love dividends because of the tax benefit of being low. And some say they live of there dividends. Does this only work in a non registered account. I have a defined contribution plan through work so therefor have quite a bit of money in RRSP and Lira accounts. Also have a maxed out TFSA account. I dont see how this strategy would work other than in a taxable brokerage account. Am I missing something here?
 

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You're right that it works in a taxable (non-registered) account ... first and then in registered ones unless you're comfortable in only purchasing growth stocks/ETFs/mutual funds or no dividends nor fixed income paying investments.

Look at it this way, are all your RRSP, LIRA, defined contribution plan invested in 100% equity assets? If so, then you're 110% correct this dividends-only strategy works "best" in non-registered accounts. I

If not, then what's the problem with the investing in dividends paying stocks, ETFs or mutual funds strategy in your "registered" accounts for that matter.
 

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Discussion Starter · #3 ·
You're right that it works in a taxable (non-registered) account ... first and then in registered ones unless you're comfortable in only purchasing growth stocks/ETFs/mutual funds or no dividends nor fixed income paying investments.

Look at it this way, are all your RRSP, LIRA, defined contribution plan invested in 100% equity assets? If so, then you're 110% correct this dividends-only strategy works "best" in non-registered accounts. I

If not, then what's the problem with the investing in dividends paying stocks, ETFs or mutual funds strategy in your "registered" accounts for that matter.
 

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Discussion Starter · #4 ·
Thanks Beaver. Most of my money is index funds. Vanguard S&P and Vgro by vanguard. I understand your point. My thoughts were if I had 1,000,000 in my RRSP and all in dividends for example and i averaged 3% on the dividends that would be an total of 30K in dividends. If I was to remove this I would not be taxed at the dividend rate of lets say 12% but rather would be taxed at my marginal tax rate for that year. Am I understanding that correctly?
 

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I do have some dividend paying stocks in my registered accounts, primarily because the yield is so good - examples ENB and rate reset preferred shares. Currently, ETF’s comprise 50% of the investments in registered accounts. Most of my financial assets are in non registered accounts - 75% in dividend paying stocks.
The only pension I have is CPP so the income from my investments is critical.
 

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@Danny You understand that correctly but remember you got a full tax credit against taxable income, i.e. using before tax dollars, to invest in your RRSP. It is only fair that all proceeds be taxed on the same basis (methodology) on the way out. What you are trying to compare is apples and oranges.

Regardless, a number of die hard dividend investors have their entire taxable account invested in Cdn dividend eligible stocks to optimize (maximize) the tax benefit. I wouldn't be concentrated like that but different strokes for different folks.
 

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The idea that distributions are bad in a registered account is objectively incorrect. The truth is, it doesn't matter where gains come from in a registered account. They are taxed the same.

In this way, all that matters is total gain in a registered account.

Outside a registered account, investing to optimize tax liability over total gain has not historically been the most productive approach. This concept pivots on the idea that all companies produce the same total gain but they do not.

The most important aspect is to own good companies. How they distribute profit to owners is also important but less so. A great many companies don't distribute much profit to owners at all. Instead, the money is soaked up at the executive layer.

My primary mission as an investor is to find honest management that work hard. From there, I do try to optimize tax a bit but this is a secondary objective.
 

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Regardless, a number of die hard dividend investors have their entire taxable account invested in Cdn dividend eligible stocks to optimize (maximize) the tax benefit. I wouldn't be concentrated like that but different strokes for different folks.
It's nice to consider taxes, but overoptimizing isn't worth it.
I think dividends also increase your income (and credit back) so they may not be optimal in retirement.


I think dividend paying companies are typically a lower risk, more predictable business, and I like them for that reason.
They counter balance some of more more aggressive choices.
 

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I'm still in accumulation, and like having dividend paying and DRIP stocks in my registered account (largest part of my portfolio by far, as I get group RSP matching at work and then pull into my own account to manage). I like the acceleration of DRIP growth and dividend growth, which is currently +/-doubling approximately every 4 years.

Slope Rectangle Line Font Plot
 

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Don't forget that an RRSP gets converted into a RRIF eventually, forcing a minimum annual withdrawal. Therefore, having dividend paying stocks in that portfolio is still a good strategy.
I'd also add that it's indistinguishable from having normal (not dividend oriented) stocks.

For example let's say you hold XBAL in a RRIF. You are forced to take annual withdrawals. Some of that XBAL is forced to be converted to cash and paid out each year. So the holdings don't have to be dividend stocks to have payments come out on a RRIF schedule.
 

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... I think dividends also increase your income (and credit back) so they may not be optimal in retirement.
Potentially ... though my understanding is that OAS has to be being paid for this to matter.

Where OAS is being paid, the wrinkle for eligible dividends is that where other forms of income count dollar for dollar, eligible dividends are grossed up when counted for the OAS income test for the clawback. So $100 of other types of income counts as $100 for the income test while $100 eligible dividends counts as $138 (i.e. one is closer to the limit than cash received suggests). The credit comes after the line for the OAS income test so it does not help.

Capital gains have a similar issue. Using current year capital losses reduces/eliminates the capital gain before the OAS income test. Previous year capital losses have no reduction as they are applied after the OAS income test.



Cheers

PS
Something like a REIT that pays most of the distribution as return of capital will have almost no impact on income.
 

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Potentially ... though my understanding is that OAS has to be being paid for this to matter.

Where OAS is being paid, the wrinkle for eligible dividends is that where other forms of income count dollar for dollar, eligible dividends are grossed up when counted for the OAS income test for the clawback. So $100 of other types of income counts as $100 for the income test while $100 eligible dividends counts as $138 (i.e. one is closer to the limit than cash received suggests). The credit comes after the line for the OAS income test so it does not help.
Not sure exactly what your saying here but if you're saying that you're worse off having the OAS clawed back b/c of edivs being grossed up, I don't agree and have done many what ifs proving the point.

Clip below from taxtips.ca

Tax Tip: Although Canadian dividends increase the OAS clawback, the net tax payable is still much less than with interest or foreign dividends.[/QUOTE]
 

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Not only that, the real value of the dividend is its grossed up value, not the actual AT amount you receive in your account. An investor is simply being credited for the corporate tax paid on the cash flow prior to being distributed to re-establish its BT value in your income stream. The fact that it is calculated on a 38?% corporate tax basis rather than one's MTR is the only variable.

The whole debate would go away IF corporations paid dividends out of BT revenue and then themselves write that off at a 38% tax rate on their corporate tax returns. How it is managed on T1 tax returns is correct.
 

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Not sure exactly what your saying here but if you're saying that you're worse off having the OAS clawed back b/c of edivs being grossed up, I don't agree and have done many what ifs proving the point ...
I'm saying for those who care about the clawback and/or have options to avoid it - AFAICT, this is the way eligible dividends has an impact.


Clip below from taxtips.ca

Tax Tip: Although Canadian dividends increase the OAS clawback, the net tax payable is still much less than with interest or foreign dividends.
Sure ... but then again, up until recently - to have the interest paid be roughly the same size as eligible dividends being paid at 4%+, would have required a lot more capital be tied up.

It's complicated where there is a lot of variation.

Cheers
 
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