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Interpreting a Weak Dividend Triangle – Part 2

Worried about holdings that show a weak dividend triangle? Revenue and EPS are falling, dividend growth is slowing down, or worse absent. What do you do? Last week we explored how to analyze falling revenue in a weak dividend triangle. Now we look at interpreting weak EPS and dividend growth.A triangle showing a dividend triangle metric in each of its corners

In last week’s article, we explained the importance of putting metrics fluctuations in context and that the trend is your friend, meaning you must look at the evolution of metrics over time to understand what’s going on. Missed it? Read it here.

When earnings per share (EPS) are down

Earnings going down means the company is making less profit, not something that you like to see. Again, however, you must put that in context.

First, understand where that number comes from. EPS is based on accounting principles. Consequently, major events like impairments, one-time charges for an expansion and acquisition, and amortization impact the EPS even though these events aren’t necessarily bad things. Seeing the EPS go down raises a flag regardless, and it must be investigated. Reviewing the trend in Adjusted EPS (also called non-GAAP) can help here because one-time charges and amortization are not included.

Companies that make a lot of investments in assets or infrastructure have a lot of amortizations, and their EPS fluctuation often causes confusion.

Example: Brookfield Corporation (BN.TO / BN)

Recently, at the same time Brookfield Corporation (BN)’s EPS was going down, it announced a generous dividend increase. A business whose profit is plummeting is raising its dividend. “I’m losing my job I think I’ll buy a car.” It doesn’t make sense.

Since BN makes a lot of investments, it’s better off to look at funds from operation (FFO) and FFO/share rather than EPS. The FFO/share is at homemade metric and is not always easy to find. Financial websites show the adjusted EPS or EPS; digging into the quarterly statements and investor presentations will give you the correct picture. For Brookfield, they showed a company that’s growing and thriving, but EPS isn’t showing that profit yet.

Find stocks with a strong dividend triangle from our Rock Stars list, updated monthly!

Example: TD Bank (TD.TO /TD)

Another example from last year was TD Bank which had lots of one-time fees in its financial statements.

  • Fees for TD’s decision to abort the acquisition of First Horizon, a prudent move in light of many U.S. regional banks having problems with their balance sheets, and some of them going bankrupt in 2023.
  • The FDIC, which ensures deposits in the US, requested a special assessment of all banks in the U.S. As TD does a lot of business there, it spent $100M for FDIC assessment, passing the stress test and proving it’s well capitalized and has a robust balance sheet
  • Due to the economy, all banks had to raise their provisions for credit losses.

Combining these three unrelated factors hurt the EPS, whose trend doesn’t look sharp right now.

Graph of TD's dividend triangle that shows weakening EPS but steady dividend growth
TD EPS fell, but dividend growth is still there

Yet TD kept increasing its dividend last year and will continue in 2024 why? While the one-time events hurt the business, going forward, we’ll forget all about those as the business will thrive.

What about dividend growth slowing down?

Slowing dividend growth is usually the result of the rest of the dividend triangle; it’s rare to see a company with a high single-digit to double-digit growth for revenue and earnings whose dividend growth is slowing down.

If you see a dividend increase slowing to 3% and then 1% after being at 6% over 3-4 years, chances are both revenue and earnings were slowing down before that. It is prudent management to slow dividend growth rather than bleeding a balance sheet to death just to pay shareholders, but it’s also a red flag.

Find stocks with a strong dividend triangle from our Rock Stars list, updated monthly!

Can the payout ratio help to assess dividend growth health?

Yes, definitely. When the dividend triangle is weakening and the dividend growth is slowing down, the payout ratio is probably rising. Now we’re looking at the Sell button on our dashboard. However, it’s important to look at the appropriate payout ratio. There’s the classic payout ratio based on earnings. As I said earlier, earnings are based on accounting principles, not on cash flow. You should be mindful of that.

The cash payout ratio is an interesting metric. It’s based on free cash flow, so it does not consider the company taking on more debt to finance capital expenditures. For a capital-intensive business, the cash payout ratio is not perfect either. Instead, use the funds from operation FFO payout ratio. You could also simply compare the company’s dividend per share with the amount of Distributable Cash Flow (DCF) per share to see if there is room there for future dividend growth. See The Different Payout Ratios – A Quick Tour for more details about them.

Again, context is essential. That said, a weak dividend triangle and a payout ratio getting higher starts to scare me a bit more and bring me closer to selling, but I’ll do more research.

What other metrics can help understand a weak triangle?

When I’ve established that I’m concerned about a stock’s triangle, I start by looking at the cash from operations metric, because cash is closely linked to the ability to pay a dividend.

I also look at the long-term debt trend. If the debt keeps rising, and the payout ratio is above 100%, the company is leveraging its future; it better succeed in bringing profit and cash flow to the table and later because if not, it’s literally financing its dividend.

Growing debt can be understandable when there are large projects to fuel growth; the company is financing its projects and using its cash from operations to pay dividends. However, this situation cannot be sustained for a long time. It can last for a few years, but at some point, the company must stop adding debt and pay some of it down.

What’s next?

If after looking at these two sets of metrics (the three dividend triangle metrics, and the payout ratio and debt), I feel it might be fine to keep the stock, I do more qualitative research. The goal is to understand more about what’s wrong with the business model. Is it the economy hurting the business? Competitors? Can management resolve the problem? Has management said it was addressing the problem during the earnings conference call? If they just ignore the problem, that’s another source of concern.

For how many quarters should we tolerate a downtrend?

It’s not so much about a set number of quarters, but rather the reason why the metrics are slowing down. If it’s due to an economic cycle, like a recession that causes many companies in the consumer discretionary to have even two years of bad results or poor growth. Knowing that it’s normal in a recession, I would not sell after one year. However, if it’s because the business is losing market share and not finding ways to improve over several quarters, then it would be getting close to my sell list.

 

Interpreting a Weak Dividend Triangle – Part 1

Do you have holdings showing a weak dividend triangle? Revenue or EPS is stagnating or falling, dividend growth is slowing down, or worse there is no dividend growth. Do you sell right away? Not so fast. First, interpret the weak dividend triangle to know what’s really happening and make the correct decision.

What’s the dividend triangle again?

The dividend triangle is a tool I’ve been working with for over ten years, successfully and it forms the basis of my investment process. The dividend triangle includes three metrics: revenue, earnings per share (EPS), and dividend.

  • The key to my investment strategy is to find companies that are capable of growing their revenue, either organically or by acquisition, but that constantly find ways to grow their sales. As investors, we want to invest in thriving companies. A company that found a way to grow its sales year after year is the first thing I look for.
  • Next on my list that, as an investor, I want to see in a company is more and more profit. Earnings per share track that. Every year, I want to see a company with more sales and higher earnings per share.
  • After finding this magical Unicorn—well, truthfully, many companies show strong revenue and earnings growth—the next factor I want is for the company to reward its shareholders with yearly dividend increases.

Get great stock ideas from our Rock Stars list, updated monthly!

Why these three metrics?

A triangle showing a dividend triangle metric in each of its cornersSince I focus mostly on dividend growers, I want to see constant and often increasing dividend growth. Good and constant revenue and EPS growth are preconditions to a growing and sustainable dividend. The combination of these three metrics often leads to companies that have positive cash flow, repetitive and predictable income, a robust balance sheet, and a business model that has plenty of growth vectors.

A company with a strong dividend triangle also comes with another bunch of great metrics. As an investor, that’s the type of business you want; a thriving business able to go through a recession without too many worries and that’ll honor its promise to increase its dividend year after year.

Learn more about the dividend triangle here.

What does a weak dividend triangle mean?

Look at Equinix’s dividend triangle. It’s easy to understand a positive dividend triangle, right? Revenue keeps growing as does the earnings per share. The dividend growth is steady and even increasing.

Three line graphs highlighting the strong dividend triangle for Equinix: trends of revenue growth, EPS growth, and dividend growth
Equinix (EQIX): a strong dividend triangle

How do we explain a weak one? What do we do when a good company’s dividend triangle is weakening? What if one metric goes down? After a bad quarter or even a few bad quarters, don’t instinctively click the Sell button. Just like our energy level and our weight, numbers fluctuate, it’s normal.

It’s all about interpreting these deteriorating numbers to see what’s happening and whether things will get better soon. As I like to say, the trend is your friend. You must look at the triangle metrics over time, 5 years is a good duration, to see whether the poor results are a hiccup or part of a downward trend over a long time.

Along with the trend, it’s important to put the results in context, i.e., understand what is going on with the company, or around the company, that is making one metric, or the entire triangle go down, or up for that matter. Monitoring your stocks every quarter will help you to quickly spot trends and put results in context.

Get great stock ideas from our Rock Stars list, updated monthly!

When revenue is going down

Whether revenue is fluctuating down or up, you can often find the context for the change in the quarterly results press release or the investors’ presentation. They usually explain the factors that affected the revenue positively and negatively. Revenue could be down for a pretty good reason in which case you shouldn’t worry too much. Here are some examples:

  • Currency fluctuation. Take Coca-Cola; it makes many sales outside of the U.S. and generates a lot of revenue in other currencies. Revenue reported in U.S. currency is affected by the exchange rate. A U.S. dollar getting stronger will affect its revenue downward. To see if there was revenue growth or not, it’s important to also look at the numbers on a currency-neutral basis, which is stated in the press release.
  • Cycle of innovation or product cycle. Look at Apple’s dividend triangle below. There’s no frenzy around iPhones, nor is the company launching many products. As a result, over the last five or six quarters, sales and earnings haven’t grown as fast as they used to. This is normal if you look at Apple’s history. It goes through product innovation cycles and occasionally there’s a pause in growth before starting another upcycle.
Three line graphs showing Apple's dividend triangle. Sales and EPS at a plateau for the last 2 years as per its innovation cycle
Apple’s sales and EPS reaching a plateau due to the company’s innovation cycle
  • Industry-wide cycle. We can think about basic materials and the energy sector for example. If you look at the 2015-2020 period versus 2021-2026, when we get there, we’ll have a completely different picture of the energy sector; the whole sector goes through cycles.
  • Sometimes it’s just the economy. Recent reports from Home Depot, Canadian Tire, and railroad companies reveal there are slowdowns. We cannot expect huge revenue or earnings per share growth for 2024, and possibly 2025. This isn’t limited to a specific company, but entire cyclical industries getting hit by consumers spending less.

Putting the revenue slowdown in context helps you to differentiate between a temporary cause, such as a cycle fluctuation or a negative currency impact, or a permanent situation. By permanent situation, I mean things that are specific to the company and not resolved by time alone, if at all. This could be a company losing market share as it cannot adapt to increased competition (think Blackberry), or a business that isn’t relevant anymore because it’s in a dying industry and fails to innovate or diversify; remember printed media and video stores?

What about falling EPS and slowing dividend growth?

Yes, the triangle isn’t just about revenue. EPS and dividends are also key metrics that can show signs of weakness. We’ll explore that in next week’s article, along with a few other metrics.

In the meantime, it’s important to understand that you must look at more than one metric to assess the state of a company’s performance, good or bad. Also, remember that putting things in context is a must and the trend is your friend!

Common Investing Mistakes: Waiting for Market Pullback & More

Among common investing mistakes is waiting for market pullback hoping to buy stocks at a cheap price. Another is holding on to loser stocks hoping their price goes back up. These mistakes put your retirement at risk and keep you from sleeping well at night. Learn what you can do about it.

Learn about the other three frequent mistakes investors make here.

Download our Recession-Proof Portfolio Workbook to learn more about building a resilient portfolio.

Waiting for a Pullback

Buy low, sell high, basic and sound investing advice for anyone starting their investing journey. So, what do you do when the stock market keeps climbing higher? You’re not going to buy high, are you? When the market’s trading close to an all-time high, it’s very tempting to wait for the next crash before investing

Why you do this

History is full of investing horror stories. Over the last 25 years alone, we’ve seen the tech bubble, the Twin Towers terrorist attack, the 2008 financial crisis, the oil bust in 2015, the 2018 quick bear market, and the 2020 pandemic crash. Inexplicably, many investors think of the events of went up 145% while the U.S. market tripled!

Graph of total returns for ETFs of TSX 60 and S&P 500 from 2008 to 2023

Hoarding cash until the next crash seemingly makes sense; you’ll buy shares at an incredibly low price and enjoy strong returns when they go back up. Why buy now if you can get it cheaper later? And, while you wait, you won’t lose any money on the chunk you hold in cash. A win-win situation; earn interest on your cash now and bargains in the market later. Wrong!

How it hurts your portfolio

It’s true that investors who invested in 2009 show impressive results today. If the events of 2009 occurred every 5 or even every 10 years, waiting for a major pullback would be a defendable strategy. The opportunity to invest after a major stock market correction is quite rare. Since 1970, there have only been three pullbacks that would’ve been worth the wait (1973-74, 2000-01-02 and 2008-09).

Bar chart showing yearly market variation since the 1928. Only three major market crashes since 1970.
A long wait – Only three major market crashes since 1970

Most often, you’d wait nine years for the next major crash. Who can afford to wait a decade to invest? An insidious effect of waiting is that it makes you doubt your investing plan. Case in point: on December 26th, 2018, both markets had just decreased double-digit from their peak levels. Did you invest all your available money then? This was a major pullback. You probably didn’t invest more money in December 2018 because you were thinking about the possibility of another 2008 or 2000-2002. None of us knew it was the start of yet another bullish segment. Nobody waives a flag to tell us it’s time to buy.

Fixing it

In 2013-2014, most financial analysts and the media said the market was overvalued, be it Forbes, Goldman Sachs, or Motley fool. Everybody agreed the market was way overvalued again in 2017, and again in 2022.

Stock Buying Process: child following instructions to assemble Legos
Build according to plan

In 2017, I didn’t care where the market was from a valuation standpoint. Selecting from the finest dividend growers at that time, I built my portfolio. Even if a pullback happened 3 months after I invested, I knew my dividend payments would continue to increase during the correction. Sooner or later, share values would go back up… because this is what happens, repeatedly.

Despite 2018, a terrible year, I was better off fully invested during that time than if I had kept 30% to 50% of my portfolio in cash to invest on boxing day. The capital appreciation from early fall 2017 to summer of 2018 combined with the dividends paid exceeded temporary losses incurred during the rest of 2018. None of the calculations I made showed that waiting would have been better.

So, when you think you shouldn’t invest money, focus on your dividend growth plan instead of the stock value. To add in some protection, you can plan to invest at intervals over a 6- to 9- month period. See How to invest a lump sum.

Investing with confidence prevents waiting for a pullback. Our DSR portfolio returns show that even during the market correction of 2018, the focus on dividend growing stocks minimized losses. The best protection against a market crash is a solid portfolio, holding robust dividend growth.

Download our Recession-Proof Portfolio Workbook to learn more about building a resilient portfolio.

Thinking it’ll Bounce Back

Many people invest in the wrong companies. Making poor investment decisions happens to all of us. My positions in Lassonde (LAS.A.TO) and Andrew Peller (ADW.A.TO) were in the red, about 30 months after I bought them. For a while, I waited, but eventually sold my shares of both as they didn’t fit my investment thesis.

Why you do this

Hourglass
How long do we wait?

None of us want to buy high and sell low. We’ll justify the first 10-20% loss as a temporary setback, the market doesn’t get it, or investors will realize it’s a good company. It’s hard to admit mistakes. It hurts our ego, and our brain does all it can to protect that ego. So, we patiently wait for our losers to come back on track and prove us right.

We also tell ourselves that selling at a loss is acting on fear, and we don’t let our emotions drive our transactions. It’s good reflex to have, but we must analyze our losers to decide to keep or sell them.

How it hurts your portfolio

Investors keep their losers because they focus on the money lost. After making a bad investment that’s trading 40% lower than what you paid, not much else can go wrong. How can you possibly lose more? So, you keep your shares thinking one day it’ll bounce back, and you could recover your money.

In doing so, you leave a lot on the table; there’s an opportunity cost when keeping your money invested in a bad place. What if you cut your losses and bought shares of a strong dividend grower instead? Worried you’ll make another mistake? It could happen, but since you already made one, you learned from it and will make better choices.

Some years ago, I held shares of Black Diamond Group (BDI.TO). The company faced challenges after the oil bust of 2014-2016 and cut its dividend. Sticking with my investing principles, I sold my shares right away and took the loss. I wasn’t happy to lose money and felt a bit dumb for having bought it in the first place. I was wrong with my investment thesis, and I wasn’t fast enough to see the dividend cut coming. Instead of whining about my bad investment, I moved on. With the proceeds, I bought shares of Canadian National Railway (CNR.TO / CNI). The rest is history:

Graph showing CNR's total return from 2016 to 2023 far outpacing those from the Black Diamond Group

Had I waited for better days with Black Diamond, I’d have suffered a second dividend cut and lost even more money. Meanwhile, my new shares of CNR appreciated in value substantially and the dividend kept increasing.

Fixing it

Investigate why your loser stocks are losers; perhaps they suffered a one-time event or temporary setback? Or perhaps metrics over 5 years show more serious problems with the company, like lack of growth, absence of dividend increase, a dividend cut, ballooning debt, etc. To avoid future mistakes, find where you went wrong; were you blinded by the company narrative, seduced by a high yield, in denial about the risks the company faced? See 7 Reasons we end up With Loser Stocks, What to do About it.

Build a list of replacement stocks; those you’ve researched and would like to own. The best way to get over selling a loser at a loss is to get a shiny new thing!

 

 

High-Income Products: Making Life Easier?

Are high-income products really making life easier for retirees? Investing $100K in something giving back $800/month, a 9.6% yield, is appealing for retirees. Financial companies even say, “no need to worry about the unit price as long as you receive your payment”. If you get your monthly paycheck, why be concerned? Well, you should.

Child crossing stream on logFinancial companies, like asset managers, make fees based on the amount of Assets Under their Management (AUM). The higher the AUM, the higher the revenue and profit. Retirees are very profitable customers for these companies because of their sizeable savings, often in the hundred of thousands, that make growing AUM a lot easier than millennials investing much less. What do retirees want? Income!

When stock dividend yields are low, and interest rates on certificates of deposit, GICs, and bonds are low, how are financial companies able to generate additional income from their products? Often, with options and leverage strategies.

Using derivatives, they write covered call options and cash covered put options, or purchase call options. You put your cash in a black box, the firm shakes it a bit and pays you back. Often these strategies are fraught with risks. Consider the following points when contemplating these products.

Learn strategies for generating income for life. Download our guide now.

Understanding the strategy

Read the fine print to understand the strategy, Picture of a Magnifying glassFinancial companies often use a mix of options strategies to create income; you must understand what you’re investing in. You’ll have to read pages of boring stuff, and don’t stop at the description either!

From Financial Split (FTN.TO)’s description: “…is a high-quality portfolio consisting of 15 financial companies made up of Canadian and U.S. issuers”. With a 13.5% yield, it sounds promising. Further, you find this in their 2022 annual information form:

“Up to 15% of the net asset value of the Company may be invested in equity securities of issuers other than the Portfolio Companies.”

And: “To supplement the dividends earned on the Portfolio and to reduce risk, the Company will from time to time write covered call options in respect of all or part of the Portfolio.”

It goes on to mention writing cash covered put options or purchasing call options, purchasing put options to protect itself from declines in the market, trading to close out positions, using derivatives for hedging purposes, etc.

In English: on top of what’s in the portfolio, there could be 15% of “mystery” equities. It’s up to option strategists to work their magic to generate astronomical income.

How did FTN.TO work out for investors? Well, the monthly distribution remains unchanged since 2008. Oh, it skipped 34 monthly payments between September 2008 and December 2020, including 18 consecutive months starting in 2012 (source). So, not well at all.

These complex options strategies might work, or not. They do well when the market is moving up, not so much when things get volatile. From what I’ve observed, I feel that these aren’t products to expose your hard-earned savings to at all.

Learn strategies for generating income for life. Download our guide now.

Leaving money on the table?

I understand wanting income in retirement, but don’t neglect total returns; if you do, you might leave a lot of money on the table. Imagine investing in a new High Income DSR fund requiring a minimum 100K investment and starting with 9% yield.

Over time, you notice that while you’re getting your 9% yield, your 100K isn’t keeping up in value. Total return (capital gain + dividend) is still positive, but you didn’t make the money you would have with a classic index ETF. How would you react?

In my opinion, the value of your portfolio is just as important as the money you receive monthly. Compare the total return of high-income products with a benchmark (index fund, dividend ETF) to see how they measure up to the total return you’d get from more traditional investments.

Comparing apples to apples

To judge high-income products correctly, you must compare them to appropriate benchmarks. The returns for Canoe EIT income fund (EIT.UN.TO) show that, over 10 years. it beat the TSX consistently.

Table showing Canoe Income Fund returns versus those of the S&P/TSX Composite Index over 1 month to 10 years and since inception. It shows Canoe outperforming the index throughout.

Beating its benchmark and a yield >9%? Perfect for retirees. Or is it? The EIT fund profile, shows 43.4% is invested in U.S. equities.

Pie chart showing the Canoe Income Fund's asset mix: 54.4% Canadian equity, 43.4% US equity, 2.5% International equity, and 0.7% in fixed income.

Therefore, the correct benchmark is a mix of Canadian, US, and international indices, not the TSX index.

To compare apples to apples, I used a portfolio containing a mix of index ETFs that mirrors EIT’s asset mix: 54.4% XIU.TO for Canadian equity, 43.4% SPY for US equity, and 2.5% XEF.TO for international equity. The red line shows this index ETF portfolio’s total returns, including dividends, as of 7/31/2023.

Line graph showing total returns for Canoe Income Fund and custom index-EFT mix that is a more appropriate benchmark than the TSE index.

The index ETF portfolio 5-year return of 60.19%, or 9.88% annualized, is much lower than EIT.UN.TO at 13.5% annualized. However, Canoe didn’t consistently exceed the index ETF portfolio over 10 years; actually, EIT.UN.TO returns were equal to or below indices until 2021 when it surged ahead.

This is thanks to the management team’s superb job in positioning the fund portfolio to surf the energy boom in 2020. In 2022, the energy sector was one of very few sectors in positive territory, the S&P 500 closely resembled a bear market, and Canoe beat relevant indices.

While Canoe doesn’t use the correct benchmark to show its merit, the fund does generate strong results. However, between 2013 and 2019, it was barely better than the TSX. A single move, going massively into oil & gas, made a huge difference.

Learn strategies for generating income for life. Download our guide now.

In closing

Not all high-income products are terrible. In fact, Canoe has a pretty good overall performance. Comparing it to Financial 15 Split Corp (FTN.TO), with its complex strategy and poor results, clearly shows how the management team can make a huge difference.

The Canoe fund could be interesting to generate a high income but, looking at the graphs below, keep this in mind: 1) your capital likely won’t grow over time and 2) neither will your dividend.

Line graph showing Canoe Income Fund unit price change and dividend change for 10 years up to 2023. Reveals not appreciating in value and dividend payment is flat.
Where’s the growth?

You’re still better off with a classic investment strategy that generates a higher total return. You can sell a few shares to create your own retirement income. See Generate Enough Retirement Income from Your Portfolio.

Next week, more on high-income products: split-share corporations and covered call ETFs. Stay tuned…

Puzzled about Old Age Security (OAS)?

How is Old Age Security (OAS) different from the Canada Pension Plan (CPP)? Who is eligible for OAS and what is the benefit amount? How does one apply for OAS benefits? What is this OAS claw back you’ve been hearing about? So many questions, so little time. Look no further, here are the answers, in a nutshell.

What is Old Age Security (OAS)?

Old Age Security (OAS) is a taxable monthly payment the federal government gives Canadian residents and/or citizens who meet the eligibility criteria, once they are 65 years old or older.

How is OAS different from the Canada Pension Plan (CPP)?

Orange maple leaf held up to the daylight in the forest in the fallUnlike the Canada Pension Plan (CPP) and the Quebec Pension Plan (QPP/RRQ), the OAS is not a pension to which you and your employer(s) contribute over the years. OAS payments come from the taxes the federal government collects each year.

Another key difference is that OAS payments are not based on how long people have worked or how much money they earned. OAS benefits are paid to every eligible citizen or legal resident, even if they never received employment income.

Want to know more about the CPP/QPP? See Explaining the Canada Pension Plan (CPP).

Who is eligible to receive OAS?

You are eligible to receive OAS payments if:

  • You are a Canadian citizen or legal resident.
  • You are 65 years of age or older.
  • You currently live in Canada and have resided in Canada for at least 10 years since the age of 18, or you don’t currently live in Canada but have done so for at least 20 years since the age of 18.

There are rules for other situations; for example, if you lived outside Canada while working for Canadian employers, or if you have contributed to other countries’ social security programs.

How much will I receive in OAS payments?

View from the top of the horseshoe-shaped falls in Niagara Falls, OntarioThe amount of the OAS payment depends on how long you have lived in Canada since the age of 18, and the age when you start receiving the payment. Your OAS monthly payment increases by 10% when you turn 75 years old.

The amount of the OAS benefit is reviewed and updated four times a year to adjust it for the cost of living.

Surely there is a maximum OAS payment…

Right you are! As of June 2023, the maximum OAS payment is $691 per month ($760.10 per month for people 75 and older).

The maximum payment is paid to people who lived 40 years in Canada after the age of 18, and who have a net income that is below a specific threshold for the calendar year prior to the payment. More about that later.

Find out how to get an estimate of your OAS benefits, download our guide now.

How do I apply for OAS?

Most eligible Canadians do not have to apply to start receiving OAS payments; when you get close to the age of 65, you’ll receive a letter from the government indicating when you will start to receive OAS payments. However, if you decide to delay receiving your payments, you must notify the government.

Delay the start OAS payments! Whatever for?

Hip looking senior women, short white hair, red leather jacket, bulky jewelry and sunglasses with cheeky smileYou can delay receiving OAS payments until the age of 70. For every month after your 65th birthday that you delay receiving your first OAS payment, the government increases the amount you will receive by 0.6%, or 7.2% per year.

Once you start receiving OAS payments, you cannot change your mind; in other words, you cannot pause the payments to delay to a later age and receive a higher payment.

What is the OAS claw back?

The purpose of the OAS is to provide some financial protection and reduce poverty in old age. OAS recipients who have enough income from other sources to live comfortably must pay back some or all of the OAS payments they receive. This is often called the OAS claw back; the government calls it a recovery tax.

What is the income level at which
I have to pay back some of my OAS?

As of July 1st, 2023, if your net income is below $81,761, you do not have to pay back any of the OAS benefits you receive in 2024. For incomes above that threshold, the amount to pay back is 15% of the difference between your net income and $81,761. The income threshold is updated yearly.

What is considered income for the OAS claw back?

Income includes work income, pensions, CPP payments, withdrawals from RRSPs, and dividends, capital gains, and interest earned from non-registered investments.

Download our guide to get tips for choosing when to start receiving OAS payments, and more information.

What do I need to do about OAS?

  1. Decide at what age you want to start receiving OAS payments.
  2. Before you turn 65, you will receive a letter from the government letting you know when to expect your OAS benefits, and the amount you will receive.
    • If you want to start receiving OAS at 65, and all the information in the letter is correct, you don’t have to do anything. If there are errors in the letter, you will have to contact the government.
    • If you want to delay the start of the OAS payment, you will have to notify the government before you turn 65.

Why does the Government of Canada pay OAS benefits?

Side by side headshots of James S. Woodsworth and Abraham A. Heaps
L to R: James S. Woodsworth and Abraham A. Heaps

We can thank two labour party MPs, James S. Woodsworth and Abraham A. Heaps, both from Winnipeg. In 1925, they accepted to support prime minister Mackenzie King’s minority government in exchange for his promise to, among other things, create old age benefits.

At the time, many seniors were living in poverty. The jobs they had relied on to earn a living were disappearing as industrialization profoundly changed how goods were produced. Younger workers who were supporting their aging parents struggled to save money for their own old age.

Although Mackenzie King resigned before creating the old age benefit, he was re-elected in 1926, this time with a majority. He kept his word. The Old Age Pensions Act came into effect in 1927.

 

 

Explaining the Canada Pension Plan (CPP)

You’ve heard about the Canada Pension Plan (CPP), you see it on your income tax slips, you’ve paid into it. You know the CPP is a benefit you can start to collect in your 60s. Still, you might be a little hazy on the details.

  • How much does the CPP pay?
  • Who is eligible to receive CPP payments?
  • Is it taxable?

You’ve also heard some people start to collect CPP when they turn 60 while others wait until the age of 70. Why? When is the best time to take it?

If you live in Québec, or have worked in Québec, you might have heard about the Québec Pension Plan (QPP, or RRQ in French). Is that different from the CPP?

Want to demystify the CPP? We do too. Here it is.

What is the Canada Pension Plan (CPP)?

Created in 1965, the Canada Pension Plan is retirement benefit payable to Canadians who have earned employment income and have paid contributions to the CPP. It was created to address growing poverty among retired Canadians.

Child with his back to us, standing in a park with the Canadian flag draped over his shouldersThe CPP is funded by contributions made by Canadian workers and their employers. The contributions are a percentage of the employees’ salary, up to a maximum yearly contribution. The employee contributions are withheld from the workers’ pay by employers. The Canada Pension Plan is one of the largest pension funds in the world.

The CPP covers all Canadian workers except those in Québec who are eligible for the equivalent Québec Pension Plan (QPP), also known in French as the RRQ.

Another retirement benefit for Canadians is Old Age Security. Read all about it here next week.

How much does CPP pay?

The amount of your monthly CPP payment depends on how long you have contributed to the Canada Pension Plan, how much you’ve paid into it, which is based on your salary, and at what age you begin to collect CPP.

As of January 2023, the maximum monthly payment someone can receive, when starting at age 65, is $1,306.57. The average monthly payment for people starting to receive CPP at 65 is $811.21.

You can see an estimate of the CPP amount you’ll receive, based on your contributions to date, on the Government of Canada website. If you are a Québec resident, you can see an estimate of your QPP on the Government of Québec website.

Download our CPP & OAS Guide right now for easy instructions for accessing your estimate.

Who is eligible to receive CPP payments?

Anyone who has contributed to the Canada Pension Plan during their life. You can begin receiving the CPP payment as early as age 60, and at age 70 at the latest.

Is the CPP payment taxable?

Yes, it is. There’s always something, isn’t there? For some help on that front, read our Retirement Tax Optimization Basics article.

Do the payments change over time for inflation?

The CPP payment is adjusted once a year, in January, based on the Consumer price index (CPI) All-Items Index.

Some people begin to receive CPP payments at 60, while others wait beyond age 65. Why?

The age at which you start receiving CPP affects the amount you receive. To make the decision, consider your retirement plans, health, and financial situation.

Taking CPP early, meaning before age 65, means your payment is reduced from what it would have been at age 65, by 0.6% for each month before your 65th birthday at the time you start receiving it.

Moose standing on a snowy road in the forest sniffing the groundFor example, if you begin receiving the CPP when you turn 63, which is 24 months before your 65th birthday, your payment is reduced by 14.4% (24 months * 0.6%) from what you would have received had you waited until your 65th birthday.

On the other hand, if you delay receiving the CPP beyond age 65, the payment you receive increases by 0.7% for each month you delay. So, someone who begins receiving CPP when they turn 69, four years after turning 65, receives 33.6% (48 months * 0.7%) more than they would have at age 65.

Once you start receiving CPP payments, you cannot cancel. The payment you receive is set and will not change, other than the yearly review to account for the cost of living. In other words, there is no do-over; you can’t stop the payments and delay them to a later age to receive a higher amount.

Want to know more? Download our CPP & OAS Guide.

Why take CPP early?

Reasons for taking the CPP early include needing the income sooner than age 65, and having good reasons to believe you will not live to age 80, such as current health issues, lifestyle, or family history.

Senior citizens enjoying a sunny day at oceanfront beachSome people take CPP early to have more money to enjoy life while they are young and active retirees; this can be the right choice, as long as they have enough savings or another pension to rely on in their later years to make up for their lower CPP amount.

Who delays receiving CPP?

People who have significant savings, another pension plan, or both, as well as those who plan to keep working part of their 60s might also prefer to delay receiving CPP. In doing so, they’ll get a larger amount and better financial protection should they live to a very old age.

Remember, delaying receiving CPP to a time when your income will be lower also reduces the amount of tax you’ll pay on it.