The Loonie Bin: Take your Tax Free Savings Account and shove it…. full of money!

The Loonie Bin: Take your Tax Free Savings Account and shove it…. full of money!

Take your Tax Free Savings Account and shove it…. full of money!

In 2009, we were told to go open a Tax Free Savings Account and grow your money tax free! Woo wee!

I opened a TFSA and my interest rate was 2.5%. I never knew how to fully take advantage of it, hell I never knew you could invest with one either. I went to the government website and it calculated that in 35 years, I would have $278,000! Then I got to thinking, “In 35 years, that’s probably the cost of a new car.”

Well today I’d like to show you what $417 a month can get you in 10 years. If you haven’t guessed, I really like Enbridge stock. The company is solid, its dividend is solid, so I thought it would be the perfect stock to use in this example.

The price of 100 shares of ENB on January 3, 2000 cost $1430 and the dividend they paid out was $.63 cents per share. That was a yield of 4.4% on that investment. Over the course of the next ten years, Enbridge increased its dividend by an average of 10% each year.

I searched market prices of the first day of trading in January as well as the dividend paid that year for the last 10 years.
It looks something like this:
Jan 2001| Market price $18, Dividend-$.70 cents/share
Jan 2002| Market price $21, Dividend-$.76 cents/share
Jan 2003| Market price $21.80, Dividend-$.83 cents/share
Jan 2004| Market price $26.85, Dividend-$.915 cents/share
Jan 2005| Market price $29.77, Dividend-$1.04/share
Jan 2006| Market price $36.80, Dividend-$1.15/share
Jan 2007| Market price $40.73, Dividend-$1.23/share
Jan 2008| Market price $39.94, Dividend-$1.32/share
Jan 2009| Market price $40.20, Dividend-$1.48/share
Jan 2010| Market price $48.05, Dividend-$1.70/share
Now if you had bought the 100 shares back in January of 2000 you would be making 11.8% a year on that initial investment of $1430 (1.7/14.30=11.88).
Your 100 shares would now be worth$ 4805, a 236% increase.
And you would have made $1175.50 in dividends on that initial investment. Your investment would have been paid for in 2 more years.
If you would have re- invested the dividends, You would now have 136 shares and each year you would get paid $230. Now you may think that’s not amazing at all, but you’re not looking at the big picture.
A Tax Free Savings Account (TFSA) allows you to put $5000 away each year and you are not taxed on any interest or capital gains received from that money. Well if you had a TFSA back in 2000, and saved $5000 a year for 10 years at an interest rate of a generous 3%, You would have $59038.98. Not too shabby.
If you had bought $5000 worth of Enbridge stock each year, and re-invested the dividends, You would have 2323 shares of stock. With a dividend of $1.70 in 2010, You would get paid 3438.04 annually tax free! And that’s just the icing on the cake. The market value of the $50,000 you had invested over the ten year period is now worth $111,620.15!
That’s just for starters. Compounded growth starts to snowball after ten years. If you kept investing for another five years, the annual dividend payment you receive would be double. If you kept if up for 30 years, I think the results would make for a VERY comfortable retirement… TAX FREE!


7 comments:

Angie & Darcy Fee said…

Darcy and I love to read your blog entries, Steve… Sometimes it’s the highlight of our day!🙂

Financial Cents said…

I too, am a big fan of Enbridge. Got my hundred shares now and it’s been DRIPing away for the last year. I too, love the sound of a leaky, DRIPing tap. Cheers!

addicted2dividends said…

Have the DRIPs been working out for you? I have heard that its best to save your dividends to buy a large chunk of dividend stock when its at a good price.

rrrrrr said…

ok, what is a DRIP? And where did you find a TSFA with a 2.5% rate? All the banks websites’ say 1.25%… and any bank will let you invest your TSFA? And that means that you are “managing” your portfolio daily? Because it all sounds very nice, but how simple is it really?

addicted2dividends said…

A DRIP is a Dividend Reinvestment Plan. It allows you to buy shares with your dividend payment directly from the company, usually at a 1% discount and no commission fee.

When I first opened my TFSA in 2009 it was at a 2.5% rate. It’s only been a year and its gone down that much.

To invest in a TFSA, you must set up an investment account through a discount brokerage. I made one visit to the bank I deal with (TD), asked to open a cash account and a TFSA, signed some papers and within a week I was buying stock.

I do not manage my portfolio daily, I just look at how well the stocks I own perform everyday. Once you buy stock, for me at least, it is very exciting to see my stock make money without having to do anything. And like I’ve said before, with good dividend paying companies, you don’t need to manage a thing. The whole point of dividend investing is waiting, letting your payments compound over the years. Email me at addicted2dividends@gmail.com if you have more questions.

David Dukes said…

Could a DRiP strategy end up leaving a loss of diversification?

Addicted2dividends said…

David,
Although DRIPs allow you to get the best bang for your buck, it does hinder diversification in your portfolio.

The strategy I follow lets me reinvest my dividends in the most efficient way possible and at the same time allows me to diversify my portfolio. If I have dividends coming in from a Tel com and utilities, I can then use them to purchase shares of a consumer staple or energy company. And I can purchase them when they are priced right,where as a DRIP you are forced to buy at the current market price.

I think once you have a portfolio with 16-25 companies, you might want to switch to DRIPs to add to your holdings by saving on commissions. I just used one company as an example to simplify everything.

About EdR

Tant que les lions n’auront pas leurs propres historiens, les histoires de chasse continueront de glorifier le chasseur. (proverbe africain)

Posted on February 7, 2011, in training tips. Bookmark the permalink. Leave a comment.

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