Dividend Paying Stocks and TFSA

A TFSA Account
I was looking at what could possibly be done with a TFSA account and I just thought I would throw this in.

A Model of TFSA Investing
I made a model of investing for TFSA, assuming you were putting in $5,000 a year and got a return of 10% with 7.5% of capital gain and 2.5% of dividends. Dividends were increasing at 9% a year. Dividends were being reinvested. At the end of 12 years you could have $86,061.22 and at the end of 20 years $315,740.56.

I am assuming you are investing in good quality dividend paying stocks.

How realistic is this model?
My long term results on Fortis (TSX-FTS), which I first bought in 1987, are 13.4% per year to the end of 2011. Of this total return, 4.9% is attributable to dividends and 8.5% to capital gain. Dividends are 49% of my return. The 10 year median dividend yield is 3.3%. The 10 year dividend growth is 9.5%, per year.

My results on Enbridge Inc. (TSX-ENB) that I have had for only 7 years is 20.1% per year to the end of 2011. Of this total return, 3.5% is attributed to dividends and 16.6% to capital gain. Dividends are 17% of my return. The 10 year median dividend yield is 3.3%. The 10 year dividend growth is 10.8% per year.

I bought Power Financial Corp (TSX-PWF) first in 2001 and more in 2011. My total return to the end of February 2012 is 8.5%. Of this total return 4.4% was attributed to dividends and 4.1% to capital gain. Dividends are 52% of my return. The 10 year median dividend yield is 2.8%. The 10 year dividend growth is 14.47%. (This is mostly life insurance, but they do have some mutual funds. They have done better than Manulife and Sun Life. Like more life insurance companies, they have not raised dividends recently and for this company, since 2009.)

My long term results on Bank of Montreal (TSX-BMO) that I first bought in 1987 are 15.9% per year to the end of 2011. Of this total return, 6.4% is attributable to dividends and 9.5% to capital gains. Dividends are 40% of my return. The 10 year median dividend yield is 3.8%. The 10 year dividend growth is 9.6% per year.

My long term results on Royal Bank (TSX-BY) that I first bought in 1999 is 17.9% per year to the end of 2011. Of this total return, 5.6% is attributable to dividends and 12.3% to capital gains. Dividends are 31% of my return. The 10 year median dividend yield is 3.3%. The 10 year dividend growth is 11.7% per year.

I have had CDN Tire (CTC.A) for a long time also, some 12 years. I have a return of 10.8% per year to the end of February 2012. Of this total return, 1.9% is attributed to dividends and 8.9% to capital gain. Dividends are 18% of my return. The 10 year median dividend yield is 1.3%. The 10 year dividend growth is

What to do about dividends and other small amounts?
Dividends income will start out low. To reinvest them you can use the DRIP facilities most dividend paying stock have. The blogger My Own Advisor covers DRIPs quite thoroughly, so I am not going to go into how this works. See his site.

Or you can just add the dividends to the amount you want to invest in the following year. I sometimes buy small cap dividend paying stocks for small amounts of money in the TFSA account.

You can also buy Mutual funds. I know banks like to the TD allow small amounts for some of their funds. For example TD Canadian Index – e (TDB900) allows $100 initial and subsequent investment. The subsequent investments can be any amount they just have to be $100 or greater. Say you had $246.28 in your account you could just clear this into the mutual fund. All the low investment mutual funds have low yields and this one has a yield 1.85%. It is a no load and MER is just 0.33%.

If you are just starting out you should buy utilities and banks. You can buy less than a board lot of shares. A board lot is a financial term, usually meaning 100 shares and most stocks are sold in 100 share lots. However, you can buy and sell odd-lots (less than 100 shares). You may not get the best price, but it will not be far off and if you plan to hold on to the shares, this will not be a long term problems.

Markets:
For 5 year periods since 1956, we have had 4 years of TSX negative return. Over 10 years, we only had one period of TSX negative returns since 1956. TSX returns over 10 years range from 8.2% to 203.4%. If you had been including dividends there would have been no period of negative returns. For 15 or 20 years periods the TSX does not even come close to a negative period since 1956.

US had 2 10 year periods of negative returns and also one ending in 2008, I believe, since the 1920’s. The TSX has done better over the last few years than the US market.

You also have secular bear and bull markets. These last around 15 years. We have been in a secular bear market since 2000. (Although there is some arguments that the Canadian market has moved out this secular bear market, but the US has not.) Secular bear markets tend to be volatile and muck around and not make much progress as far as stock prices are concerned.

Secular bull markets have strong upward movements. They also have pull backs in stock prices, but overall the stock prices move up. In both secular bear markets and secular bull markets, you have cyclical bull and bear markets. Cyclical bull and bear markets are a lot shorter in duration than the secular bull and bear markets.

Conclusions:
Depending on when the 10 year period was, you could or could have not have achieved the 10 years goal. However, I think that over a 20 year period you most likely would.

See my spreadsheet at TFSA_div.htm.

This blog is meant for educational purposes only, and is not to provide investment advice. Before making any investment decision, you should always do your own research or consult an investment professional. See my website for stocks followed and investment notes. Follow me on twitter.