INVESTING TIP

Markets wobble, yet there are certain ties( well, almost) for stocks of companies with solid market positions and histories of raising their dividends. The price of a stock with a 4-5% dividend—banks and tel cos, for example—backed by a company that raises the dividend by 5-10% every year will tend to follow the rising dividend upward. It’ s not guaranteed to work, but even if the stock sags for many years, the dividend will eventually makeup the loss.

Bet tina wants to quit as soon as possible.

When Charles retires at 65 and his tax bracket drops, he can split his wife’ s $48,000 pre-tax pension from previous employment. He should have full Canada Pension Plan annual benefits of $13,110 at 2016 rates, while Bet tina would get an estimated $11,483. Both will get full Old Age Security of $6,846 per person per year, using the 2016 rate. Their investment cash flow of $92,300 would bring their total income up to $178,585. Split evenly, their individual incomes would be $89,293. They would be exposed to the O AS claw back, which began at around $74,000 in 2015. Anything over that amount would be taxed at 15%, costing each about $2,300 and reducing their income to about $174,000. Each would pay income tax at an average rate of 23%, making after-tax income about $11,165 a month.

Most of the couple’s income in retirement will come from defined-benefit job pension sand government pensions. Given their margin of income over core expenses, Charles and Bettina could sustain a substantial income decline without having to change their way of life in retirement. But they have a serious problem: their portfolio is so light in common stock that it will be unable to keep up with inflation. Their present allocation is 76% fixed income ,9% cash and just 15% equity.

Chartered financial analyst Nigel Roberts, who heads Blue nose Investment Management Inc. in Lake Country, B.C ., says the couple’ s portfolio structure is quite lopsided in favour of fixed income .“If they are going to pace inflation, they have to re structure to 60% equity and 40% fixed income ,” Moreover, he adds, there are more than 80 assets in their portfolio, such as $3,852 in Boston Pizza Royalty Income Trust units, and managing so many small positions is difficult.

Roberts says their first move should be to put all their assets in one institution rather than spread among three as it is now. That would make management easier, since there would be only one set of accounts. The second move is to raise the common share equity of the portfolio to 60% with 40% remaining in fixed income, a blend that would be expected to produce a 6.5% gross return. If inflation run sat 2.5% and they pay investment management costs of 1% to their investment dealer or independent advisor, their portfolio would have a 3% net real rate of return. They would pace inflation and have rising dividend income, Roberts notes.

But there is still more to be done. The majority of positions in the portfolio are quite small. Many of the bonds and notes are illiquid short-term instruments that mature within a few years. It would be costly to sell them, as investment dealers no longer make active markets in the small corporate issues. They have to find buyers and then take big cuts for the bother. As a result, patience will be a virtue, Roberts says. Charles and Bettina should aim for a couple of dozen equity positions, each with an approximate size of $24,000.

They can also make their portfolio more tax efficient. About 78% of the portfolio is in tax-sheltered accounts so a shuffling of their assets is in order. Trading accounts should hold Canadian common shares and non-dividend-paying foreign company shares. U.S. dividend-paying shares should be in the couple’s RRSP, since there is no withholding tax on foreign dividends held in retirement accounts. Interest-paying investments such as bonds and GICs should be in registered accounts or tax-free savings accounts, Roberts adds.

The new portfolio can be built up over time as cash is released from matured bonds and mutual funds, which are sold when their deferred sales charge penalty period send.