Thursday, December 18, 2008

mr.dividend, the third earner

This article originally appeared on The DIV-Net in November of 2008.

It really is a luxury for my wife and I to have a third income earner in our household. This constant cash earner may not bring in a lot of money now but I think he has great potential to grow his earnings going forward.

This third partner in our family income is non other than our non-registered investment portfolio, let's call him "Mr.Dividend". Because Canadian dividends are tax advantaged, and regular employment income comes with a lot of baggage like taxes, pension fund contributions, and employment insurance deductions, Mr.Dividend's income is purer than mine or my wife's income. Mr.Dividend's take home pay currently is probably about $2,500 on gross earnings of around $3,000. In order for my wife or I to make an equivalent net amount we would have to pull in about $4,000 gross.

Here are some of the other characteristics of Mr.Dividend's income that I like:
  • Likely to grow at a much faster rate than our employment income
  • Mr.Dividend is lazy, and he really doesn't do anything
  • His income is very secure; impossible for Mr.Dividend to lose his job
  • I could potentially grow Mr.Dividend's income automatically every time he gets paid by setting up Dividend Re-investment Plans
  • Mr.Dividend earns money while he consumes none of our household resources, and he never complains.
A triple income family is always better than a dual income family. Why not make Mr.Dividend part of your financial future.

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Kirk said...

Another good article. I find I'm coming to your blog more often now. My goal for the new year is to get 2 or 3 DRIPs set up. My first house purchase will likely happen in 2009 as well, so I won't be going "all-in" in dividend paying stocks yet.

Your article yesterday was a nice simple example of getting a DRIP set up. Very appreciated. Have you ever written an article showing a tax comparison for a Canadian owning a Canadian dividend paying stock vs a US dividend paying stock? I.e. if each was paying a 5% yield, what return would you get. I'm not clear on how the US withholding tax works.


MG (moneygardener) said...

Hi Kirk, Thanks for the support. I have a never written a post on the tax differences of Canadian vs. US holdings outside of a registered account for Canadians. There is plenty of good information about this on other Canadian blogs as well as on financial webring forum. The IRS takes 15% of your dividend before you even see it. I believe at tax time you get a benefit for paying this 15% but you are then taxed on the US dividends as income. At the end of the day there is a wide gap between the tax treatment of US vs. Canadian eligible. The amount of the gap will depend on your total income. The take home message is that US dividends are better collected in a registered account.

retire-at-40 said...

Great post and I love the way you call him 'Mr. Dividend', it's a great idea.

Here in New Zealand I'll have to look hard to find shares that pay dividends, at least I don't think it's as popular here as it is elsewhere. I hope to get into this a bit more in 2009.