Monday, January 29, 2007

Roadmap for my RRSP

My understanding so far is that there are 3 ways to grow my existing RRSP:

1. Add new funds
This is the conventional way which most of the Big5 banks encourage the typical middle class family that is worried about their future, to contribute to their RRSP with outside funding. They convince you to start automatic RRSP contributions through payroll deduction, and then proceed to sign you up for these mutual funds that they "recommend."
Been there, done that, got the t-shirt, and it ain't nothing to write home about.
Based on my previous post, it just doesn't make sense tax-wise to allocate new funds to the RRSP.
The reason I have an RRSP in the first place was because my (former) employer had a program whereby they would match (up to 3%) my contributions to their company sponsored group RRSP. It was free money, so there was no compelling reason to turn down the free money. But now, I don't have anyone willing to match my contributions, so what incentive do I have to contribute to my RRSP ?

2. Capital Gains
Another way to grow my RRSP is to trade equities, and accumulate the capital gains inside the RRSP. The problem with this is that the brokerage commissions make it cost prohibitive to trade frequently inside my RRSP, unless I actively trade more frequently (ie. make more than 30 trades per 3 month period). I am already actively trading in a separate account unrelated to my RRSP account, so it becomes a bit laborious to have to actively trade from 3 different accounts at the same time (my wife's SD-RRSP, my own SDRRSP, and my non-registered investment account). That doesn't mean it can't be done, and it's a viable option, but one that will cost a bit of time and effort.

3. Dividend Growth.
The other way to grow my RRSP is to buy some companies that have consistently grown their dividends in the past 5 or 10 years. For example, most of the Big5 banks (RBC, BMO, CIBC, BNS, TD) pay 2 or 3% dividend yield. All of them have consistently increased their dividends at least once every 15-24 months or so, so after about a decade or so, the dividend yield should be close to 10%. If you want some "harder" data, here is a snippet of a discussion I had with a poster on the Canadian TMF board:

" Original Poster: The info I have readily on hand on my desk, 10 years dividend CAGR as of Novemeber 2005:

IGM 22.2%
RY 16.0%
BNS 15.9%
BMO 13.6%"

Me: Thanks for providing the info. So are you saying that IGM doubled their dividend about every 4yrs on avg ? If so, that is not too bad at all, and clearly better than any of the big5.

Poster's Response: YES - IGM doubled their dividend about every 4yrs on avg.

So, it is like getting a paycheque from this company every quarter, plus the added bonus of the paycheque doubling every 4 years. Not too bad in my mind.
The other thing I like about Dividend Growth stocks is that they are low maintenance. Once you have found a company like IGM that consistently grows their dividend, then you simply buy it and let the magic of time and compound interest do its thing. You need not worry about your holding every day, but probably just need to check up on it once each time they release their quarterly earnings report.
The only drawback with this approach is that it requires time, lots and lots of time, before the dividends are big enough to be relied upon for income.

My approach to grow my RRSP will be some custom, hybrid combination of the latter two methods.

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