It's TFSA time!
I remember when tax free savings accounts were announced a few years ago. I thought to myself that it would be a great way to save money and not pay any tax on the interest I earned. Like most Canadians, I was oblivious the true potential that a TFSA could offer a smart investor. I remember I was offered an interest rate of 2.5% and within 6 months that rate dropped to below 1%.
Now that I have become "Financially Aware", I invest my money in dividend paying stocks with a tax free trading account. By investing in stocks with proven dividend growth, my return will grow each year with each dividend increase. Last year my return was 3.5% and after a dividend increase last month, my return is now 4%.
On January 3rd I called my online broker and told them to transfer $5000 worth of BCE stock from my cash account to my tax free trading account. The amount of dividends that accumulated in my TFSA last year was $340. With my new contribution for 2011 my dividend total will be $575. It doesn't matter how much the value of the stock goes down, I will still make $575 in dividend income.
I could take that money out at any time, but instead I'm going to re-invest it to buy more shares which will in turn pay me even more dividends. By contributing the maximum amount each year and re-investing the dividends, I will be able to turn a small amount of money into a nice chuck of retirement change thanks to the power of compounding; transforming my TFSA into a compounding dividend machine. If I need money for any reason I can withdraw the dividend income tax free, and not have to touch the principle investment. The longer I leave the dividends to be re-invested, the more money will be available the following year. In 20 years, I will have a growing tax-free income to possibly help pay for a child's education or allow me an early retirement. The possibilities are endless.
I know not everyone can afford to make the maximum contribution of $5000 each year, but it's a good idea to save as much as possible to utilize the potential of this amazing investing opportunity.
14 comments:
You're right, and in my opinion everyone should be utilizing this strategy in their TFSA. Some people complain about the low $5k annual limit, but if you invest in dividend growth stocks over 20 years you will have a nice steady tax free income stream without even eating into your capital.
Exactly Echo.
I know a lot of people think you should be investing in growth stocks with a TFSA, but there is a lot of headache and hassle trying to time the market to make a decent profit. I'd rather sit back, enjoy life and let my money work for me, not the other way around.
Nice move. I'm going to write about this at some point as well. Question though - when you did the move, didn't you need to deem the BCE shares as "sold", a deemed disposition?
I believe you need to pay capital gains when moving shares from a non-registered brokerage account to a TFSA.
Yes, you do have to pay capital gains. I bought these shares not very long ago, so the gains will be minimal.
Yep, that's the great thing about TFSAs -- future income and growth won't be taxed. Although there's so much you can do with $5000/yr, they fill an important place in one's portfolio of accounts.
Curious why you didn't just buy 5K of BCE within the TFSA and avoid Cap Gains. Did you convert the stocks to a DRIP?
Dear Loonie Bin:
"would you please let you readers know your detailed portfolio (and original investments, costs) - it would be very interesting to see how they have performed. Also, re Connolly Report..pl comment on this and how/what you have learned from it. Thanks ever so much and waiting to hear from you.
Box 532: I bought the shares fearing they were going to sky rocket, sadly they did not. I don't have a ton of cash right now so I ate the $50 in taxes.
Dear Anonymous:
I am not comfortable sharing my "detailed portfolio (and original investments, costs) with the entire world. I will eventually talk about all the stocks I own through future posts. I will share with you that my new investment strategy is 100% better then just buying mutual funds and praying.
Although I'm a huge fan of Tom Connolly, I can't become a member because membership is closed. His investment strategy is,
"When they are at least fairly priced, I purchase certain common stocks with a long record of dividend growth and hold them for years, waiting for the dividend and the yield to grow."
I totally agree with his strategy and after combing his website for information, I was able to figure out the majority of stocks he follows. I've posted a list of stocks I'm following and will update it with dividend increases and growth history. Hope this helps,
Addicted2dividends
Yes it helps. Thank you for your frankness.
Addicted, I'm confused. Are you reinvesting the divs "inside" the acct or are you withdrawing and recontributing the new stocks the following year?
I'll be pooling the dividends to buy more shares from within the TFSA.
Just wondering...do you have all your portfolio in dividend stocks? any US dividend stocks? any dividend ETFs? (like Xiu)
Gibor:
The majority of my portfolio is in dividend stocks and once interest rates increase, I will be stacking my left over cash in GICs just in case.