Susan P. Brunner Interview – What It Takes to Live Off of Dividends

Susan P BrunnerSusan P. Brunner has over 40 years of investing experience. She started investing in the 1970s, and by 1999, she was able to stop working and live mostly off her dividends. Susan is a dividend stock investor, and over the years she has tried many different investment approaches and strategies. When I asked her about this, Susan said that she tried them all, but dividend stock investing has been the strategy that has worked for her.

Back in April, I published my controversial post on living off dividend income – Can You Live Off Your Dividends? Susan left a couple of comments, and at that point, I knew she was somebody with a wealth of experience and knowledge that I wanted to interview.

With over 40 year’s investment experience, I really wanted Susan to share her experience and knowledge with others. That is really the point of this interview, to listen to someone who has successfully been implementing the dividend investing strategy for decades. I feel the interview with Susan is both an inspiration to all investors, and a valuable insight for those of us who already are dividend investors.  Who can argue with 40 years of investing experience?

Dividend Ninja:
Hi Susan, thank you for visiting the Dividend Ninja and taking the time for this interview! As mentioned in my intro I’m delighted to interview someone with over 40 years of investment experience. I really think you have a lot of wisdom and prudent advice to share with others.

Susan:
I would like to thank you for having me.

Dividend Ninja:
How did you get started, what inspired you?

Susan:
I started to invest in the 1970s in order to try to lower my taxes.  I started to read books on investing and especially books on investing in stocks.  However, in the 70’s interest rates were quite high and rising.  I started investing first in GICs and then in Canadian Savings Bonds.

Canadian Savings bonds were quite interesting in the 70’s and 80’s and you could pay for them monthly and cash them in, in November each year.  I started to do this in the 80’s to buy stock.  The first stock I bought was Bell in 1982.  That was the same year I also bought a 17.25%, 5-year GIC.  So, you can see why GICs and Bonds were attractive at that time.

Once I got going, I realized that investing was a viable way of making money, so I developed a long-term plan to save, stop working and read.

Dividend Ninja:
And you did stop working, and live off your investments, didn’t you?

Susan:
When I stopped working in 1999, about 50% of my money was in a trading account and the rest was in RRSPs.  Around 12% of my RRSP money was in a Lock-in RRSP with the rest in a regular RRSP.  I have read extensively, so I knew about taking money from investment portfolio for living expenses.  There is what is called the 8%, 4% rule.  That is you should invest to get a return of at least 8% and you should take out no more than 4%, each year.

Since I could not take money from the lock-in pension, I took my withdrawals from the RRSP and Trading Account.  I have a spreadsheet that shows the dividends I receive each year by account and stock.  I use this to project my dividend income over the next 5 years.  I also have a budget for each year and I use the current one to project my budgets for the next 5 years.

The thing with stocks is that there are good and bad years for the stock market.  Since I never want to be in the position of having to sell something at an inopportune time, I do a 5-year projection to ensure I will have enough cash and dividend income to cover my expenses.  Because we have just been through a recession, my cash is a bit run down, but at the end of the year or maybe early next year, I will be selling something in the RRSP account to increase its cash.

Dividend Ninja:
Susan, have you made any changes to this plan?

Susan:
Over the past 11 years, I have made a number of changes.  One, I have been shifting money from my RRSP account to my Trading Account.  Originally, I was selling stocks in both my Trading and RRSP accounts to make meet my expenses.  Now, I am selling stocks in the RRSP accounts, but buying in my Trading Account.

I have also shifted the sort of stock mix I had.  I used to have a lot more of low dividend, high growth stocks (like Saputo, TSX-SAP) and fewer high dividend, low growth stocks (like TransAlta (TSX-TA or REITs).  I am shifting stocks to get an overall dividend rate of 3.5%, and this is up from my 2.5% to 3% dividend yield.

Dividend Ninja:
How would you tell others to get started?

Susan:
I think a good idea is to start small.  Start by buying 100 shares of a well-known stock and see how things work out.  I did not really understand much about investing until I started to do it as well as read about it.

Also, if you want to end up with some money for retirement, it really must be a two prong attack.  You not only have to invest, but you have to get your expenses under control.  This really means living below your means.

I also dabbled in this and that in investing.  I invested in Bonds and found out that the bond market was much riskier and volatile than the stock market.  It was also not very transparent when it came to fees.  I invested in mutual funds and found that there were far more mutual funds than stocks.  I even had investing in index funds and ETFs.  As with mutual funds, there are now more ETFs than stocks.

People say that they invest in ETFs and Mutual Funds because they cannot decide what stock to invest in. This is just another safety in numbers idea.  They find stock investing confusing and intimidating.  But since there are such a bewildering variety of mutual funds and ETFs, are they not just changing one sort of decision for another?  Does it really get them anywhere?  At least if you invest in a well know a company like Rogers or Canadian Tire they show up in the newspapers and people often discuss them, so you could get a feeling for how they are doing quite easily.

I have always found it quite incredible that people will spend more time deciding what brand of toothpaste or shampoo to buy than what to invest in.  They hand over thousands of dollars for some investment they know virtually nothing about but spend hours on deciding on something costing a few bucks.

Dividend Ninja:
Do you believe in using leverage or margin?

Susan:
Not really.  I never had a margin account.  However, I do have a line of credit and I have borrowed money to invest.  I have not done this extensively and I have never borrowed more than $10,000 to invest.  I do not believe in having debts.  I have bought cars and once a cottage.  However, I took out money from my trading account and paid cash.

The other advantage in having not having debts, but some savings, is that if something happens to your job, your stress level can remain good.  And, things do happen; I lost jobs, had a company I worked for go bankrupt and a company I worked for was bought out.  I think having savings gives you confidence in the future and the ability to coup with stress of something bad happening.

Dividend Ninja:
How did you cope with the 2008 and 2009 crash? Did it change your investment style?

Susan:
This was not the first crash I have been through.  It is also the second one since I stopped working.  I do have a cushion of 5 years of dividends and cash so I do not have to sell anything at an inopportune time for spending needs. I am quite comfortable with my current portfolio and I really have nothing to worry about.

I do check out any stock that stopped their dividend increases or decreased their dividends.  In the end, I did not sell anything.  You usually have to be more worried about stocks that decrease their dividends or stopped dividend increases when there is no crisis.

This crisis was the same as others.  My dividend increases slowed down.  Some stocks stopped rising dividends and some cut theirs.  This mostly happens after the crash.  It was 2010 when I had the lowest dividend income increase of just 5.3%

Stock market crashes are going to happen.  There will be ones in the future and some sector will be hit harder than others will.  I often just stop looking at the market.  No sense getting upset over something I have no control over.  And, it too will pass. The economy will again recover and the market will also recover.

Susan:
Thank you for having me! One thing I wanted to add is that when I was laid off in 1999, I knew that I had reached my portfolio goal for stopping working. But I did not know if I could live off my income.  The problem was that I was looking at Gross Income.  I should have looked at Net Income.  When I did, I realized that my Net Income was the same, although my Gross Income was not.  The difference, of course, was income tax.

When I was working I was paying income tax on salary and dividend income. When I stopped working, I was paying taxes on my dividend income (which I was spending) and my RRSP withdrawal amount.  My taxes went down a lot.

Dividend Ninja:
Susan, that leads into my question about RRSP’s. Back when you started the TFSA wasn’t available, so you put a lot of money into RRSPs.  Since you have used your RRSP withdrawals for income, would you like to comment that?

Susan:
I got into investing in RRSP’s as they were heavily being pushed by all sorts of financial advisors and financial reporters.  Of course, putting money inside an RRSP also saves you ongoing taxes.  You do not have to pay taxes on the sale of stocks (capital gains) and on income earned within the RRSP.

They also said that you could expect to be in a lower tax bracket when you take money out then when you put money into these accounts.  This did not happen for me, as I have ended up in a higher tax bracket, than when I put the majority of my money into my RRSP.  Taxes on RRSP withdrawals can be a bit of a shocker.  I must admit I did not expect the tax rate I paid.

Dividend Ninja:
That’s why in a previous post, I argued explicitly that investors should max out their TFSA first before their RRSP. Having actually withdrawn money from your RRSP, what do you think?

Susan:
I would agree that you would probably be better off putting money first in a TFSA and RRSP second. It may be after-tax money that goes into a TFSA, but you also save ongoing taxes (re capital gains and income).

Dividend Ninja:
So getting back to dividends, what do you think are the biggest challenges facing a dividend-focused strategy?

Susan:
I think you have to understand the risk that you are taking.  There is a certain amount of risk no matter what you do.  However, when investing in stocks you have to accept that the value of stocks will fluctuate.  The value of my portfolio has flipped, flopped all over the place.

However, what is interesting about dividend-paying stocks, is that my dividend income has gone up consistently each year.  You cannot count on any consistent amount of dividend income increase, but you probably can count on some increase.

So, when the market goes into some sort of crazy, volatile state, I turn my focus on income a stock is producing rather than the value of the stock.

Dividend Ninja:
What do you think of Index Investing?

Susan:
It seems like people are going to great lengths to decide on what ETF or index fund to invest in to avoid making a decision on what stock to invest in.  You also have to wonder what effect all this passive investing will have on the market.  Every once in a while you see someone expressing a concern on this subject.

I tried out indexed funds when they first came out.  I am always willing to try anything.  I never made any money from them.  I just lost money to various degrees.  So for me, it is really “been there, done that, did not work out.” So I moved on.

For example, I had TD’s NASDAQ index fund from January 2000 to February 2006.  I lost 13.3% per year on this investment.  Contrast this with Fortis, a Canadian Utility, that started off in Newfoundland.  On this company, over the same time period, I made a total return of 23.8% per year.

I had also tried out international funds.  The story was that you could make good money investing in Asia.  The only one I made any money on was Templeton’s Emerging Market fund.  I had this from April 1996 to September 1999 and made a measly 3% per year total return.  If you want to contrast this with Fortis, over the same time period I was making a total return of 9.7% per year.

Dividend Ninja:
How do you employ Asset Allocation, or do you?

Susan:
My portfolio is composed of Consumer, Financial Services, Industrial, Real Estate and utility type stock.  I also have a bit in resources, but not much. These types of stocks I keep an eye on, but never consider them a permanent part of my portfolio.

It may appear that I have excluded all but Canadian stocks, but that does not mean I have no international exposure.  I have companies like SNC-Lavalin (TSX-SNC) which does business all over the world.  I prefer to handle international exposure this way.  I let sophisticated Canadian companies handle international investment exposure for me.  Since SNC deals with a wide variety of countries, if problems develop in one, they can weather the problem quite well.  For example, this company has exposure to Libya and had to shelve a number of projects that they were doing there because of recent problems.

I do not invest in companies that are Airlines, Pharmaceutical or are into mining and resources, except on an individual basis.  I do not believe that I can make money in these sorts of companies over the long term.

Dividend Ninja:
What types of stocks do you like to invest in? (Blue chips, high yield etc.)

Susan:
Mostly I have dividend paying stocks from the of Consumer, Financial Services, Industrial, Real Estate and Utilities sectors.  I have ones with low-dividends and high-dividend growth, ones with high-dividends and low-dividend growth, and ones in between.

For example, Canadian Tire (TSX-CTC.A) has a 1.1% 5 year median dividend yield and a 5 year growth of 16% per year. REITs like Canadian Real Estate (TSX-REF) have high dividends and low growth with a 5 year median dividend yield of 5% and 5 year growth of 1.9% per year.  (Currently that is just above the inflation rate for the last 5 years.)

I also used to have some Income Trust companies with high dividend yields, but these have all converted to corporations.  I expect that their dividend yields will end up in the 4% to 5% range via stock price increases and dividend decreases, or a combination of these.

I also like tech stocks, and in the past have made money investing on stocks on a short term basis.  For example, I made a lot of money for my Lock-in Pension funds by investing in RIM for a short period of time.

I have also made money by investing in Computer Modelling Group Ltd (TSX-CMG) a rather small cap tech company that has a 5 year median dividend yield of 3.9% and 5 year dividend growth of 49% per year.  I have had this company since 2008 and have made a 51% per year total return on it.  I still have this company’s stock.

I have had loser, of course, but you can only lose what you invest.  If a company takes off, the sky is the limit on what you can make.

Lately I have been investing in small cap stocks that pay dividends.  For example, I had Pareto Corp from 2009 to 2011 and made a total return of 134% per year.  I had to sell because it was bought out.  This is the second small cap dividend paying stock I had to sell for this reason.

I recently bought TECSYS (TSX-TCS) and McCoy Corp (TSX-MCB) to try out.  I haven’t made any money on either so far, but they are recent purchases.  So it will be fun to see what happens.  The market has been wobbling around recently, but it is May, so what else can you expect?

Dividend Ninja:
What dividend screening tools do you like to use, and think are the most effective?  (i.e. dividend payout ratio, dividend growth etc.)

Susan:

[easyazon-block asin=”0965175081″ align=”right”]

For each stock that I have, and the ones I track, I do a spreadsheet.  This spreadsheet shows changes over time for revenue, earnings, dividends, Graham price, stock prices, shares, cash flow, and book value.  I look at various ratios, such as Price/Sales, Dividend Payout (re earnings and cash flow), Price/Earnings, Price/Cash Flow and Price/Book Value.  I also look at various debt ratios of Liquidity, Asset/Liability, Leverage and Debt/Equity Ratios.

I look at stocks to see if I would like to own it. I like companies that can make money for their shareholders over the long term. If I would like to own a stock, I will look at the current price and see if it is a reasonable price to pay.  It is always nice to pick up a stock you like cheaply, but the more realistic price is a reasonable one.  I will look at the stocks ratios and compare it to past ratios.  You also have to be aware of value of these ratios on similar stocks and for the market as a whole.

Dividend Ninja:
What do you think is most important for tracking your progress and returns?

Susan:
I use Quicken to track my stocks.  No matter what anyone says about stocks, I like ones that show a decent return over the long term.  Quicken will show total return per year for any stock I have.  (They call this Internal Rate of Return or IRR).

If you are not making money, why be invested in a stock?

Dividend Ninja:
Care to give the readers your favorite stock picks?

Susan:
Where I have made money is in banks and utilities. I have had Fortis (TSX-FTS) since 1987, and I have made a total return of 13.4% per year.  I have also had the Bank of Montreal since 1987, and I have made a total return of 16.3% per year.

You need to diversify, but retail stocks do not do as well as banks and utilities.  For example, I have had Thomson Corp (now Thomson Reuters – TSX-TRI) since 1985 and I bought more in 1989.  I have made a total return of 8.4% per year on this stock.

Not only do you have to pick great stocks, you have to buy them at a reasonable price.

Dividend Ninja:
Susan thanks so much for taking the time for my questions!  It’s been a real pleasure, and I hope an inspiration to all investors, and those starting out on their divided investing strategy. Thanks again for sharing your 40 years of investment wisdom and knowledge with everyone!

Susan:
Thanks for having me.

You can learn more about Susan P.  Brunner from her website and follow her on Twitter. See how she invests, and view the spreadsheets she uses to track Canadian Stocks:

http://www.spbrunner.blogspot.com/

http://twitter.com/spbrunner

15 Responses to “Susan P. Brunner Interview – What It Takes to Live Off of Dividends”

  1. Sunny

    Jun 10. 2011

    Good interview!

    Also, congrat for your appearance in the Globe and Mail, looking sharp :0)

  2. MoneyCone

    Jun 11. 2011

    Excellent interview! Thanks Susan and DN!

    Very interesting perspective and I love the idea of a 5 year cushion. Great point about taking time to research a stock!

  3. The Dividend Ninja

    Jun 11. 2011

    @Sunny, Glad you liked the interview, and thanks for the congrats 🙂

    @MoneyCone, thanx for posting!

  4. Julie @ The Family CEO

    Jun 12. 2011

    I’m excited that you found a woman investor to feature. That’s something you don’t often see. And great information for those of us learning about dividend investing. Looking forward to part 2!

  5. The Dividend Ninja

    Jun 12. 2011

    Julie, thanx for dropping by 🙂 And 40 years investing experience as well!

  6. Dividend Mantra

    Jun 13. 2011

    Great interview. 40 years of weathering the markets provides a lot of insight that we can certainly all learn from. It’s great to see someone sticking to the plan and actually living off dividends. Looking forward to part 2.

  7. My Own Advisor

    Jun 13. 2011

    What can I say? Great interview!

    Susan’s experience is something every dividend-investor should try to tap into, thanks for sharing Susan!

  8. Bernie

    Jun 19. 2011

    I’m close to retirement and appreciate your blog for insightful postings like your interview with Susan Brunner.

    Much has been posted over the years regarding safe withdrawal rates in retirement years. I would think Ms Brunner has a yield on cost much greater than 10% yet does not exceed a withdrawal rate of 4%.

    Could one not safely withdraw all of their RRSP dividend income in retirement? This income should increase over time from dividend growth and should exceed inflation rates. This would also offset the need to sell off stock for more income.

  9. The Dividend Ninja

    Jun 19. 2011

    Bernie, thank you for posting and I always appreciate hearing readers enjoying the blog.

    I’ll ask Susan to answer your question 😉

  10. Susan Brunner

    Jun 19. 2011

    The withdrawal rate has nothing to do with yield on cost. I have read all I can on safe withdrawals rates as it is a subject I am much interested in. Unfortunately, I have not saved the articles that impressed me the most.

    As I understand the 8%, 4% rule is that you plan to make an 8% compound rate of return on your portfolio and plan to withdraw 4%. Also, in this plan is an increase each year in your budget of 3% which is considered to be the long term background inflation rate for Canada.

    It does not matter what you invest in to get the 8%. Getting a high rate of return on your investment is often offset by lower capital gains (or no capital gain).

    The implications of this are that you will leave an estate. But, it is meant to provide you with money until you die, whenever that is.

    The other thing is that you will probably not be able to make exactly 8% per year. If you invest in stocks like I do, you can make a long term compound rate of return at 8% per year. (I am actually looking at a 4% long term compounded rate of increase in my portfolio after withdrawals.)

    So, for example, you have $1M. The first year you can withdraw $40,000. The second year you can withdraw $41,200 and the third year $42,436. The fourth and fifth years would be $43,709.08 and $45,020.35.

    The first illustration is the ideal with starting of 4% withdrawal, increasing at 3% per year with 8% return each year.

    Date Portfolio
    01/01/2000 $1,000,000.00
    31/12/2000 $1,040,000.00
    31/12/2001 $1,082,000.00
    31/12/2002 $1,126,124.00
    31/12/2003 $1,172,504.84
    31/12/2004 $1,221,284.87

    01/01/2000 -$1,000,000.00
    31/12/2004 $1,221,284.87
    XIRR= 4.08%

    The second illustration is starting of 4% withdrawal, increasing at 3% per year with returns of -2%, 18%, 16%, 1% and 8.75% returns. This is probably more realistic. (Note that the Average rate of return is 8.35% on this illustration, whereas the average for the first one is 8%. Average returns are not the same as compounded returns.)

    Date Portfolio
    01/01/2000 $1,000,000.00
    31/12/2000 $940,000.00
    31/12/2001 $1,068,000.00
    31/12/2002 $1,196,444.00
    31/12/2003 $1,164,699.36
    31/12/2004 $1,221,590.20

    01/01/2000 -$1,000,000.00
    31/12/2004 $1,221,590.20
    XIRR= 4.08%

    01/01/2000 -$1,000,000.00
    31/12/2004 $1,221,590.20
    XIRR= 4.08%

    This may not be a perfect solution, but I have done fine with it and I have been through 2 bear markets since I stopped working in 1999. My XIRR since 1999 is just over 4%. This can, of course, vary year by year. However, I have never taken out more money than I have earned in total returns. It may be save to take out all income earned in a portfolio. I have seen a lot of debates on this. I think you have to consider that you will need an increasing amount from your portfolio as there will be inflation.

  11. The Dividend Ninja

    Jun 19. 2011

    Susan, thanx! 🙂

  12. Bernie

    Jun 19. 2011

    Thank you Susan! I also read your blog & love your stock reviews!

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