There are too many bills. It’s time to eliminate one of them. If you are savvy with dividends you know what I’m about to go over:
What’s a dividend?
A dividend is an cash payout to all shareholders. The money for dividends comes from company profit. Thus Bell will pay you some of their profits. As long as Bell exists and offers the dividend they’ll keep paying. Theoretically you could get lifetime payments from Bell (or any other company that offers dividends).
The actual payments will seem small – a good dividend is typically 4% of the share price. On an investment of $1000 you’ll get $40 per year. But keep in mind you’ll get that 4% every year for your entire life (potentially). And the more shares you own, the higher your payout will be. 4% of $10,000 is a lot more than 4% of $100.
Make Bell Work For You
Lets say your cell phone bill is $50/month ($600/year). Bell currently pays a dividend of $0.7925/share/quarter (or $3.17/year, or $0.264/month).
-Only a quarter per month???-
Yea a quarter per month is not much but bear with me. If one share will pay 25 cents per month, how many shares are needed for a payment of $50/month?
$50/$0.264 = 189.39 (round up to 190)
You need to own 190 shares to earn $50/month. Okay….. how much is one share? $59.34 (as of this writing). Thus 190 shares will cost:
$59.34 x 190 = $11,274.60
Thus for the small investment of $11k Bell will pay you $150.58 every three months!
Geez $11,274 is a lot
But keep in mind that unlike your bill payment you don’t LOSE the $11k. You can sell your shares at any time and get some amount back. Bell has been around for a while. And people like cell phones. A lot. And there’s no reason to believe Bell won’t continue to be around for a long while. Here’s the chart of their stock since 1996:
Even during the dot com crash and the 2008 crash they maintained a considerable amount of value. I’m sure in the upcoming crash (date TBD) they’ll drop 20-30% but recover the value within 1-2 years. They probably won’t even cut the dividend!
But I could just pay the $50 bill for 225 years with that $11,274!
Well yes, but again, in that scenario you’ll LOSE the money. If you buy the stock instead your $11k will (probably) increase with time. I get that not many people have $11k lying around, but even a small contribution of say $2000 could get you about $10/month in dividends. That’s enough for Bell to buy you a sandwich every month!
For nerds – Other factors to consider
TAX – Dividends are taxable income. If you hold Bell stock in a TFSA there’s no problem, but in a taxable account you’ll be paying. Luckily dividend tax is cheap. Especially when it comes from qualified Canadian companies like Bell.
The actual dividend tax rate depends on your total income for the year. Let’s assume you make less than $95,259, that means your federal dividend tax is 7.56%. Less than 8%!!
Let’s make Bell pay your tax bill as well. To make up for that 7.56% tax you’ll need to own an additional 15 shares, or 205 shares total which will cost you roughly $12,164.70.
In summary if you want to hold your Bell stock in a taxable account you’ll need to pony up an additional $891 to cover the dividend tax bill (assuming you earn less than $95k/year)
TRANSACTION FEES – Most brokerages charge a commission to buy and sell stock. There’s no fee for collecting dividends though. So if you’re with Questrade budget an extra $5 to buy all these shares and another $5 to sell. Other brokerages might charge you upwards of $10 or $20.
LOGISTICS – Bell pays a quarterly dividend (i.e. you’ll get paid on the 15th of January, April, July, and October). Your cell phone bill is due every month. You’ll want to withdraw the dividend as you get it and use it to pay the next 3 months of bills. WARNING – Depending on your brokerage they may charge a withdrawal fee…….. hmmmm…… The big banks make it hard to find their withdrawal fees. Some offer free withdrawals but it looks like TD charges $1.50 for withdrawals from TFSAs and non-registered accounts. Questrade offers free withdrawals from all their accounts as long as you use an EFT to your bank account and not a cheque or wire transfer.
Let’s say you have to pay $5 to withdraw your quarterly dividend. That’s another $20 per year, or two sandwiches!
SEEMS LIKE GAMBLING – No it’s not, I go into that here. But yes there is a risk the stock will permanently go down or they’ll cut the dividend. But it’s a risk you’ll have to accept. Bell has been around for a long time and there’s nothing to suggest they will be going away soon. Nothing ventured, nothing gained!
You can apply this principle to any bill and any company. Why not get Fortis to pay your power bill? or TD to pay your car insurance? or Canadian tire to pay for your BBQ and propane? Why not get the stock market to pay all your bills? If your annual spending is around $40,000 and your average dividend rate is 4% you’ll be covered with $1,000,000 invested. Seems like a lot but it’s entirely possible with a lifetime of contributions. – Isn’t that just retirement? – Sort of. If you amassed $1 million and only lived off the dividends you’d still have the $1 million when you die. With a typical retirement you’d be withdrawing from the $1 million over the years.
Anywho… Dividends seem to be the next step on the investment ladder when you want to move past index funds. If this post confused you stick with the index funds and you’ll do fine.