The Government of Canada has pension plans for retirees. The Canada Pension Plan (CPP) and Old Age Security (OAS) are two such plans that provide monthly payments to retired Canadians.
The CPP retirement pension is a taxable monthly benefit. It aims to replace part of your retirement income. To be eligible for the CPP, you must be over the age of 60 and have made at least one valid contribution to this plan.
The amount of the pension is based on several factors. This includes the age at which you choose to start payment, average employment income and CPP contributions. In 2019, the maximum amount that a Canadian severance pension at age 65 could receive was $ 1,154.68. The average monthly amount was $ 679.16.
OAS is the largest pension program in the Government of Canada. It is funded by the country’s general tax revenue. OAS is a monthly payment offered to people over 65. The amount of the payment is determined by the length of your stay in Canada after the age of 18. The maximum monthly payment amount for an OAS pension holder is $ 613.53.
We can see that the maximum monthly amount that can be received after combining CPP and OAS payments is $ 1,768.21. The average amount is much lower. These pension payments are insufficient to lead a comfortable life in large Canadian cities.
Retirees must have an additional source of income to supplement the CPP and OAS payments. This can be achieved by investing in dividend paying stocks.
You can supplement the CPP with dividend-paying stocks
The COVID-19 pandemic has pushed several stocks to multi-year lows. Bank stocks such as Canadian Imperial Bank of Commerce (TSX: CM) (NYSE: CM) lost significant momentum during the recent market liquidation. CIBC shares are trading at $ 81.84, which is 29% lower than its 52-week high. Comparatively, IShares S & P / TSX 60 Index ETF trades 16% below record highs.
Investors are concerned about the rising unemployment rates in Canada which will result in defaults and defaults. The nationwide closings will also have an impact on the business sector, which is struggling with lower consumer spending. In addition, the drop in oil prices has also exposed banks to the very vulnerable energy space which is one of the pillars of the Canadian economy.
CIBC is highly exposed to the Canadian housing market, which makes the stock volatile in the short term. If the Canadian housing market collapses, CIBC’s stock will drop significantly. Although most companies pose risks in today’s uncertain environment, CIBC has solid fundamentals and has weathered several economic downturns.
It is a banking giant with a market capitalization of $ 36.4 billion. In each of the past five years, its profit margins have exceeded 26%. Net income increased from $ 3.5 billion to $ 5 billion during this period, valuing it at just 7.5 times the follow-up profit. CIBC ended fiscal 2019 with free cash flow of $ 18 billion, which makes its delicious dividend of 7.1% secure, especially after taking into account its payout rate of 50%.
CIBC is expected to accelerate the market rebound. An investment of $ 100,000 in this banking giant will translate into annual dividends of $ 7,130, allowing retirees to supplement their CPP and other retirement payments.
This is just one example of a premium dividend-paying stock. Investors must identify these companies and diversify their portfolios to create a recurring flow of predictable cash flow.
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Insane contributor Aditya Raghunath has no position on any of the titles mentioned.