Tag: cash flow

Know Your Ex-Dividend Date & Maximize Cash Flow from Dividends

This post is about creating cash flow by understanding ex-dividend dates. Buying a share in companies that pay regular dividends is way to creating passive income for yourself. Once invested, your money will be put to work. The dividends will come to you for as long as you own the shares. It’s a great way to create a steady cash flow for your later years, when you’re no longer will or able to send your body out to work. If you’ve sent your money out to work instead, then you have some assurance that it will generate an income for you at some point.

I am not promising you that this method of generating a retirement income will be quick. I’ve been investing for decades. While I’ve learned a lot along the way, I’m still not at the point yet where my dividends can support my current lifestyle. My first dividend payments amounted to tens of dollars per year, then hundreds of dollars per year. I’ve finally reached the point where I’m earning a five-figure amount of dividends on an annual basis. It’s comforting to have that passive income, even if I still have to rise-and-shine for my employer most days of the month.

You should definitely consider whether a dividend portfolio would be a good fit for your finances. If you need to hear an inspiring story about someone who did phenomenally well at divided investing, then please check out this 2-part interview at the Tawcan blog.

Dividends & Date of Record

Companies pay dividends to shareholders who buy their shares before the ex-dividend date. There is a date of record that entitles shareholders to a portion of the profits that are distributed as dividends. It’s a very important date to know if you’re planning to receive dividends. If you aren’t listed as an owner of the underlying security on the date of record, then you won’t be paid any dividends even though you bought shares or units in that security.

Every stock, mutual fund, index fund or exchange-traded funds that pay dividends will list their ex-dividend date on their website. Personally, I have a good chunk of my portfolio invested with Vanguard Canada in the VDY ETF. This ETF pays dividends on a monthly basis. I receive dividends based on a distribution price per unit. For the most part, I know in advance just how much money I’ll receive from this security before it’s paid to me. I simply multiply the number of ETF units I already own by the distribution price to be paid. So long as I’ve bought my units before the ex-dividend date, I can get an accurate amount of the dividends that I will receive on the payment date.

Click on the link and scroll down to the bottom of the page. There, you will find the distribution frequency for VDY. Pay attention to the ex-dividend date. If I wanted to be paid on any new purchases of ETF units, then I would have to buy those new ETF units before March 31, 2022 in order to get paid dividends on those units on April 8, 2022. This is because I have to be listed as the owner of those new units on the record date, which is April 1, 2022. If I’m not listed as an owner on April 1, 2022, then I won’t be paid for those units in the month of April. Instead, I’ll start receive payment for those new units in the following month.

As I said earlier, companies pay dividends to those who are listed as an owner of the underlying security on the date of record.

Creating a Cash Flow of Passive Income Takes Time

Knowing the ex-dividend dates of the securities that you’re buying will help you to forecast your cash flow. Once armed with this information, you have the ability to know exactly when you’ll be receiving your passive income.

In the interests of transparency, I can advise that I spent years and years investing in dividend-paying ETFs. (In October of 2020, I tweaked my investment strategy and have been investing new contributions into VXC.) My two dividend ETFs of choice are VXC and XDV. As with VXC, the link for XDV will disclose its distribution dates and amounts. Both of these ETFs pay me dividends every month.

I track my purchases on a spreadsheet. Each month, I update my spreadsheets with the distribution price. This way, I’m able to calculate how much passive income I’ll be earning. It’s awesome! Unlike the money from my 9-5, these dividend payments are effort-free money. Contributions to my portfolio that were made 10 or more years ago are still churning out passive money for me.

When I was a child, my parents purchased bank stocks for my brother and I. I still own them today. Those stocks have paid me dividends for decades. I just wish my parents had been wealthy enough to buy me more! Now that I’m at my current stage of life, perhaps I should do that for myself.

Procrastination is your enemy

When it comes to investing, procrastination is a cancer. It slowly and irrevocably eats away at the potential growth of your portfolio. Your money must be invested in order to work its hardest for you. Creating a steady, reliable cash flow based on dividends won’t happen through wishing and hoping and good thought. You need to actually invest the money then leave it alone to do its thing.

If you let procrastination win, then you’re not investing before the ex-dividend date. That means you don’t receive your dividends until the following month. At the start of your investment journey, you might be missing out on a few cents or maybe just a dollar. Big deal, right? It is a very big deal. The sooner you receive your dividends, the sooner you can re-invest them through a dividend re-investment plan aka: DRIP.

While you’re building your dividend portfolio, you want to earn dividends as soon as possible. They can be re-invested with your regular contributions so that the following month’s dividend payment is even bigger. Compound growth is a key to increasing your dividend payments every month. If you invest after the ex-dividend date, you’re not doing yourself any favors.

Now, I know that you can only invest when you have the money in hand. This is why I suggest that you set up an automatic transfer so that a chunk of your paycheque is diverted to your investment account. Doing so means that you have money to invest. Sometimes, the transfer will take place after the ex-dividend date. While this is unfortunate, it’s also out of your control. You cannot invest what you don’t have.

By the same token, procrastination is entirely within your control. I don’t want you to set up an automatic transfer and just let the money accumulate. If it’s not invested, then your money isn’t being given the opportunity to grow. When you’re interested in pursing cash flow through passive income, then you need to be investing your money in dividend-paying securities as soon as you can. I do my investments every month, but you may want to do your investing quarterly or every other month or once a year. Whatever you choose, ensure that it’s result of your choice and not the result of procrastination.

As with everything you learn in life, you have the option of how to put the lesson to use. If you want passive cash flow, then start today. Get your money invested. Buy your securities before the ex-divided date. Then go about your daily life while your dividends do their thing in the background.

Renting vs. Owning

I’ve been a big fan of Garth Turner, who blogs over at Greater Fool, for a few years now. He’s a big proponent of creating cash flows for retirement. Towards that end, he has written many, many persuasive posts about why people should sell their homes, invest the equity, and live off the investment income.

It’s not necessarily a bad plan. For a very long time, I thought it was a great plan.

But…

Lately, I’ve come to question how feasible this plan is for everyone who owns a house. If you’ve been in Vancouver or Toronto for a few decades, then your house could likely sell for a high 6-figure amount, possibly even a 7-figure amount. And if you’ve been there for a few decades, then hopefully your mortgage is gone.

Take that sweet, sweet cash and invest it – in a properly balanced and diversified portfolio, a la Garth Tuner. Now you’ve got cash flow coming in from your investment portfolio to pay your rent. If you’re really fortunate, your investments might even kick off enough money for you to live on. Easy, peasy, lemon-squeezy!

Yet I still have doubts…

My only concern with Mr. Turner’s advice is that not everyone has a home that, when sold, will generate enough money to live on. If a person’s in that situation, and sells, then they face the prospect of ever increasing rents. While their portfolio is growing in the background (hopefully!), it’s quite conceivable that their rental increases outpace the growth of their investment income. In this situation, portfolio income isn’t enough to pay your rent. Mr. Turner’s plan no longer works.

Are people really in a better situation if they’re renting and their employment income has to go towards rent, instead of towards buying more investments, because their portfolio’s returns won’t cover the bills?

In that situation, isn’t the portfolio more like a part-time job than a reliable cash-flow on which one can live and eventually retire? And I use the term “part-time job” to convey the idea that, while the income from a part-time job nice to have, the annual amount of money generated isn’t enough by itself to keep body and soul together.

And if their employment income and investment income are both used to pay the rent, then what happens when the employment income goes away?

Then they’re without a home, and their portfolio’s not generating enough money to cover all that needs to be covered.

Renting might not be the answer

One of my greatest financial fears is being an elderly person who rents. Once employment stops, then all expenses have to be covered by pension payments and investment returns. Pensions are disappearing at an incredibly rapid clip. Investment returns aren’t guaranteed, even if you’re one of the lucky ones who managed build a multi-million dollar portfolio before retirement.

It seems to me that a paid-off home is a cornerstone of a secure retirement. People who own their own homes don’t have to be concerned with rental increases or eviction. They can stay in their homes for as long as their health will allow.

This is great!

And yet…

Houses are so damn expensive today! Even if you’re not in Vancouver or Toronto, a $350,000 house isn’t exactly cheap when you’re earning less than six figures. If it takes you 20-25 years to pay off your mortgage, and your employer isn’t promising you a pension, when exactly are you going to have that extra money to set aside in an investment portfolio?

If you’re not one of the people who earns enough money to pay off a mortgage while simultaneously saving for retirement, then maybe Garth Turner is right.

After all, you might avoid rental increases and eviction but let’s face facts. A paid-off house won’t help you buy groceries and heat and medicine in your dotage. Reality being what it is, a person cannot spend their house one doorknob at a time in order to buy what they need, when they need it. Only money can be spent on stuff. A paid for house represents locked-in money. It’s money that cannot be invested or spent unless the home is sold or otherwise mortgaged.

So what’s the right answer?

I have no idea. The older I get, the less I really know for sure.

For many people, housing is ridiculously expensive and it requires a paycheque-to-paycheque existence until the mortgage is gone. Funding one’s own retirement by creating a reliable cash flow is also ridiculously expensive, yet it’s a task that few of us can afford to ignore.

I can certainly see the allure of living off of investment income after liquidating the equity in your home. But so many things have to go right for a very long time for this plan to be feasible. One, you have to properly invest the money. Two, you have to hang on to your investments even when the market drops during a recession. Three, you have to know what to do when black swan events have a negative impact on your portfolio.

Yet, I can also see the hazards of spending most of your working life paying for a house. One, you don’t have significant retirement savings because it took so long to pay off your mortgage. You didn’t have enough time to re-direct your former mortgage payments towards your investment portfolio. Two, you’re making a long-term bet that you’ll always have an income over the 20+ years it might take you to pay off your mortgage. Three, you forever foresake the growth that your money could’ve provided had you invested it in a well-balanced & diversified portfolio.

Again, I don’t know what the right answer is. By way of this article, I simply want you to be aware of the options, the benefits, and the drawbacks. Start figuring out what’s best for you and for your future.

Whether you choose to rent or you choose to own, make that decision with your eyes wide open and fully aware of the opportunity costs of your choice.

Prepare for Burnout

Do you want to know a secret about burnout? Here it is… almost everyone keeps burnout a secret from everyone else.

I’ve attended many graduation ceremonies in my time, my own and those of loved ones. I’ve also had various mentors over the years. While they weren’t all great, they all taught me something valuable. And I’ve also had the opportunity to read many, many books & blogs about career-planning.

Here’s the secret… Not a single one of those sources has ever told me that burnout is a thing, and that I might one day face it. Not a single one of my mentors gave any hint that they were dealing with or had ever dealt with burnout – not a single one of them said a word about it. There was never a hint that decades in a given career could lead to anything other than stability, satisfaction, and challenging work.

It’s astonishing! When you think of how many people you might know who just go through the motions, it’s really quite remarkable that there’s an almost coordinated collusion by those-who-have-gone-before to never tell those-who-are-coming along that they won’t always be happy, engaged, or fulfilled by their chosen career.

Quick! Do you love your job?

Whether the answer is yes or no, you should save money now in case you get burned out at work at some point during your working life. In my humble opinion, people don’t talk about the possibility of burnout when planning their careers. If you’re lucky, you start out eager and happy and engaged. And if you’re very, very, very lucky, you’ll continue to be enthusiastically engaged with your career for a long as you have it.

Not all of us are so fortunate. There are people who simply get burned out and simply. Can’t. Do. It. Anymore! They can’t drag themselves into work another day. If you were to ask them to be honest, they would say that they feel like their lives are being wasted as they grind it out. In short, they hate the lives that they’re living. 

Of course, maybe it’s not your job that’s causing your burnout. Maybe you have obligations to extended family that are stressful. Perhaps you’re having trouble getting out of debt. There could be an undiagnosed physical illness. Whatever the reason, the end result is burnout as you try to handle everything that’s on your plate. The ugly reality is that burnout drains your ability to feel joy, to laugh with abandon, to experience that joie de vivre that makes life so much more enjoyable.

If this is you, then know that this is not a good way to live the only life that you have!

The antidote to your burnout might be a break from work. Definitely speak to a medical professional for a proper diagnosis. At the very least, a doctor can figure out if what you’re feeling is caused by something other than your job. And your doctor is the one who can put you on stress leave if that’s what you need to recover from the horrible feeling of burnout. 

Build Your Stash

Trust me when I say that the bills won’t stop during your recovery period!!!

What do you mean, Blue Lobster?

Money in the bank and cash flow from investments gives you some options when you’re facing burnout. Instead of being miserable and continuing to feel the bleakness that penetrates to the very depth of one’s soul, you have money so that means you can quit if you need too. You have the financial wherewithal to leave employment situations which make you want to cry.

Having a nice, fat cash cushion alleviates any concerns about how to pay for life without a job. Think of your recovery as a mini-retirement, or a little sabbatical. There might not be any income coming into your household, but the cash cushion means that you don’t have to worry about that. You can focus on doing what you need to do in order to feel some joy in your life again.

It would be unfair if I didn’t recognize that there are some great employers out there who recognize that burnout is a reality. If you have burnout and work for such an employer, then you’re quite lucky despite how you feel about your job. If you’re considered a good employee, then you may be able to get time off from you employer to recuperate. In other words, good employees may be offered a sabbatical. Great! Kudos to employers who recognize the benefits of helping their best employees to deal with burnout. However, sabbaticals need to be funded with real money.

And let’s be realistic – this is a benefit that is very rare. Be brutally honest with yourself. Would your current employer give you months off to recover from burnout?

Hopefully, you’re reading this when you don’t have burnout. And if the deities are kind, you will never experience this horrible condition. But as the Wise Ones know, hope is not a plan. Take steps today to start preparing financially for a time when you just might need to take more than a week or two of vacation to re-charge your batteries.

No one likes to think about bad things happening. Sadly, this preference won’t stop burnout from occurring. Be proactive! Take steps now to financially cushion yourself just in case you need to walk away from your job to protect your mental health.

My Army is Growing

Longtime readers of this blog are familiar with my plan to build an army of little money soldiers. Each soldier is a dividend-producing unit in my investment portfolio. Every month, I direct money to my brokerage account and buy as many units as I can afford in my preferred exchange traded fund.

I’m not proficient at reading income statements or at assessing whether it’s a good time to buy a stock. There are people who are exceptionally good at doing this, like the magnificent fellow who runs the Tawcan website. I’ve chosen a different path to building cash flow from dividends – I simply buy units in two dividend-paying exchange traded funds every single month.

I’ve been doing so for the past 8 years. And I’m seeing the rewards of my diligence. My dividend cash flow covers 50% of my monthly expenses! This is fantastic news! This means I can cut back my hours at work, or move to a lower-paid position, and my lifestyle will stay the same. My dividends are supplementing my day job, but they could also be re-deployed, if necessary, to replace my income!

When I first started building my army of little green soldiers, I’d been hoping that the dividend funds would kick off a few hundred dollars a month by the time I retired. That had been my only goal. However, as I started reading blogs and learning about ETFs, I realized that my dividend cash flow could become a viable alternative to working.

I expect that by the time I’m ready to hang up my hat, the cash flow from my dividends will be several thousand dollars per month. Woohoo! Consistent monthly cash flow is the lifeblood of retirement. And whatever’s not needed can be reinvested to even even more little money soldiers. I don’t spend on things I don’t need or want right now. I’m hardly likely to change this aspect of my personality after I retire.

If you’re interested in building your own cash-producing dividend army, consistent investing in dividend ETFs is one path to take. There are many others! If you’re more inclined to learning the technical aspect of buying individual stocks, then I would strongly encourage you to visit the Tawcan website and learn how Mr. Lai built his portfolio. You’ll then be in a better position to decide which option is more appealing to you.

Cash Flow Diagrams & Passive Income

I’m a visual leaner so when information can be presented in a picture, then I absorb it a lot faster. That’s why I was so damned impressed when I came across the following link on one of my travels through the Internet: Cash Flow Diagrams. In all honesty, this is one of the best links I have ever found!  In a few simple diagrams, Jacob Lund Fisker of Early Retirement Extreme succinctly illuminates the basic underlying principles behind the following concepts:

– paying yourself first;
– acquiring assets;
– creating passive income; and
– benefiting from compound interest.

 

Much ink has been spilled and many trees felled to write numerous books to explain these four foundational concepts. Mr. Fisker has accomplished the same goal with a few hand-drawn diagrams that are not overly complicated nor difficult to grasp. Please, please, please take the time to read Cash Flow Diagrams and figure out if your current cash flow is helping you to get to where you want to be or whether it’s holding you back from achieving your personal dreams.

 

The first diagram is a representation of the cash flow in the lives of those of you who live from paycheque to paycheque without going into debt. You are working hard for your money. When you get your money, you pay for your life and you have no money left over. You have to go back to work to make more money. This is called living at your means. In other words, your means are equal to your money and you spend all of your money between each paycheque. There is no room for investing because you spend every cent you make. This is not a good way to live! There is no breathing room – there is no cushion – there is nothing set aside for the day when you can no longer work. If you’re in this situation, I implore you to find a way to get out of it. Get a part-time job and use the money from that part-time job – or side hustle as it is now called – to get yourself into the position of being able to buy assets as displayed in diagram 3.

 

The second of Mr. Fisker’s diagrams applies to those of you who live from paycheque to paycheque and go into debt. You’re in an even worse situation than the people in the first diagram because you’re using credit to fund your life. Using credit means that you are going into debt. This is a very bad cash flow situation because it means that your money is not enough to pay for your life so you’re relying on credit to make ends meet. You are living above your means, and this is a very bad state of affairs.  The reason why it is so undesirable is that you’re paying interest on the credit that you’ve borrowed. If your paycheque is not enough money to pay for your life already, then it’s an absolute certainty that your money is not enough to cover both your life and the interest owing on your debt. (Again, as soon as you use credit it become a debt!) If you’re in this situation, I would suggest that you do whatever you can to get out of it sooner rather than later. Compounding interest is working against you and keeping you from achieving what you really want from life!

 

If you have disposable income after buying whatever stuff you need to keep body and soul together, also known as: the necessities, then your cash flow is reflected in the third diagram. Disposable income is just a fancy way of saying leftover money. If you, my friend, are fortunate enough to have leftover money, then you are in the enviable position of being able to acquire some assets.

 

What’s an asset? An asset is anything that puts money in your pocket by producing an income payable to you. If you are living below your means, then you have leftover money for investing. And when that leftover money is put to good use through purchasing assets, you are well on your way to creating a stream of passive income. This is a very good thing! Ideally, everyone can get themselves to this point, namely having some amount of passive income even though, at first, that passive income isn’t enough to fund your entire life. Passive income will grow if it is diligently reinvested and left to compound over time. You still have to work, but that’s okay because working means that you’re generating more money to buy more assets that will increase your passive income. Eventually, your passive income will exceed the size of your paycheque. The faster you acquire income-producing assets, the faster your passive income will increase.

 

Once you make it to the fourth diagram, you’re laughing. At this point, the reality of your cash flow is that your assets are throwing off enough passive income to pay for your stuff. In other words, you are not required to work. You don’t have to quit your job if you don’t want to – it’s just that working for a salary is now completely optional. This is a wonderful achievement! You can do what you want with your time because your passive income has replaced your wage as the source of money to fund your life. If you’ve reached this stage, then my hat is off to you – congratulations!

 

The fifth diagram represents retirement. As in the fourth diagram, the cash flow from your assets is sufficient to fund your life and you’ve simply chosen not to work for wages anymore. At this stage, your passive income has replaced your paycheque. Hooray!

 

When I found this article online, I was already living the life depicted in the third diagram. Thankfully, I had no debt and my take-home pay was enough to pay for my living expenses – there was money leftover every payday. My student loans were gone. My mortgage was paid off. I no longer had a car loan.  At that point in my life, I knew that I had to absolutely, positively invest my money after maxing out my registered retirement savings plan (RRSP) and my tax free savings account (TFSA), but I didn’t know where or how or what to do. I didn’t trust financial advisors, so I decided to buy units in dividend-paying mutual funds. (At the time, I didn’t know that mutual funds were vastly more expensive than index funds or exchange-traded funds [ETFs] – now that I know better, I do better!)

 

I set up an automatic bi-weekly transfer of money from my chequing account to my investment account so that I could invest monthly and take advantage of the benefits of dollar-cost averaging. Automating my savings meant that I didn’t have to decide whether to set aside my leftover money. Relying on automation to fund my investment account was an exceptionally smart move on my part because I’m sure that I would’ve been tempted to buy something other than investments if I had to think about saving vs. spending every time I got paid.

 

Did I pick the perfect investment? I doubt it. I’m not that lucky nor am I that smart. Also, my accumulating years have taught me that there is no one perfect investment. I invested in a product that I understood – dividend funds – and set up a dividend reinvestment plan (DRIP) so that my dividend payments were automatically reinvested. I had no idea whether this plan would work perfectly. All I knew at the time was that dividends were a form of passive income. I knew I didn’t have the skills or inclination to read company reports and to follow the stock market. I knew that I wanted an investment portfolio that would supplement my other retirement income when I decided to leave work. Dividend mutual funds – and, later, dividend ETFs – satisfied my list of what I wanted for my portfolio so I picked one and started investing.

 

Dividend payments are my preferred form of passive income so I invest my money in dividend-producing assets. As a Singleton, I don’t have the benefits that come with having another person’s income contributing to my household. Having a reliable stream of dividend income soothes some of the risk of living in a single-income household. My goal is for my passive income to cover my monthly necessities. Once I’ve met that goal, then I’ll know that I can survive on my own even if my salary goes away.

 

As a result of my choices to automate my money and to invest it regularly, I’m now in the position of comfortably earning four figures of dividend income every month. My passive income stream is not yet enough for me to live on, so I still have several years of working in my future. However, my passive income is compounding every single month as it’s added to the new investment purchases that I make with the money that is automatically transferred to my investment account when I get paid. I’m comfortably investing the equivalent of one paycheque every month. I like to think of my dividend income as my side hustle income, even though I don’t have to do anything other than breathe to earn the dividends.

 

Where are you now? And where do you want to be in five, ten, twenty years?  How much passive income do you want in order to live the life of your dreams? What steps are you taking to put yourself in the cash flow position that you want for your future?