Pensions are kinda like having a cheerleader girlfriend. If you’ve got one, you feel an inflated sense of self-importance. And if you don’t, you’re insanely envious of that lucky SOB. Jealous enough to slash his tires? I SWEAR TO GOD I’LL DO IT I DON’T EVEN NEED A REASON I JUST LIKE CUTTING THINGS.

Sorry. That was my evil twin, uh, Flexo. Heh. These suckers will believe anything.

For those of us without a gold-plated pension, life is a little rougher. We have to save up for retirement or else run the risk of eating cat food.


CPP and OAS will help when we get older, but who wants to live on such a small amount? Besides, there are a bunch of people who are convinced CPP will go broke long before they’re around to collect any of it.

Some people are so petrified of running out of money when they hit adult diaper age that they insist on building their own pension plan. Such plans are pretty simple, mostly consisting of dividend-growth stocks, with enough diversification built in that monthly dividends are assured.

Here’s how you can get in on the action and build your own pension plan.

The easiest way

Before we begin I’d just like to point out I think it’s silly to start doing this when you’re 40 or whatever. There’s nothing wrong with building a portfolio of dividend growers if that’s what floats your boat. But it’s dumb to invest with age 65 in mind when you’re 40 or whatever. Invest for the best long-term return.

Anyhoo, the easiest way to build your own pension is through ETFs. If you’re a Canadian investor, I’d buy a combination of these three ETFs:

  • iShares Diversified Monthly Income Fund (TSX:XTR) — yields 5.3%
  • iShares Dow Jones Canadian Select Dividend Fund (TSX:XDV) — yields 3.9%
  • iShares DEX Universe Bond Index Fund (TSX:XBB) — yields 2.8%

Assuming you just built a simple portfolio of 1/3rd each ETF, you’d be looking at an investment that yields exactly 4% with less volatility than the whole market. If you wanted to add a little foreign flavor in there it would be easy to do, and a little extra yield could happen by replacing some of the bonds with either junk bonds or a preferred share ETF.

The dividend growth way

This is probably the most common way people are going about creating their own pension.

There are risks to doing it this way, of course. A lot of dividend stocks are more overvalued than terrible stadium beer. Dividend cuts are also a risk, but that’s largely mitigated by having a diverse portfolio and not going nuts looking for yield. It’s still possible today to build a portfolio filled with stocks that trade at less than 20x earnings.

Here are a dozen or so names to get you started here in Canada:

  • Telus (TSX:T)
  • Extendicare (TSX:EXE)
  • High Liner Foods (TSX:HLF)
  • Morguard REIT (TSX:MRT.UN)
  • Magna International (TSX:MG)
  • Power Financial (TSX:PWF)
  • Transcontinental (TSX:TCL.A)
  • Altagas (TSX:ALA)
  • Great-West Life (TSX:GWO)
  • Empire Company (TSX:EMP.A)
  • Boston Pizza (TSX:BPF.UN)

(Disclosure: Nelson or members of his family own Telus, Extendicare, Empire, High Liner and Morguard)

As a combined unit, these 12 stocks yield approximately 4% and offer what I think is decent potential to grow their dividends by 5-8% a year. I’m nervous about Canada’s banks and a little about the telecoms too, but overall I’d say this portfolio isn’t so bad. It’ll churn out income.

The nice thing about a portfolio like this one is you could easily set it up now as a long-term growth vehicle or just as easily use it to build your own pension.

The preferred share way

Another way to build your own pension is to use preferred shares. Preferred shares offer good income today without the volatility of owning stocks.

As I outlined in the preferred share post a few weeks ago, it’s not that hard to build a portfolio of preferred shares that yield between 5.5% and 6%. That offers much better income today than most traditional stocks, but without the potential for dividend growth. You could create your own growth by reinvesting some of the proceeds. You would pull out 4% while reinvesting the other 1.5-2%.

Such a theory would work with junk bonds or buying a basket of REITs too, but those come with much more market risk.

The bottom line

It’s not that hard to build your own pension. All it takes is investing intelligently with income in mind. That could mean investing in ETFs, individual stocks, preferred shares, junk bonds, or even stuff like private mortgages or Lending Loop investments. As long as it pays a reasonable dividend, any investment has potential to be in such a portfolio.

But I wouldn’t start investing with such a thing in mind until you get closer to retirement age. Focus on building the biggest nest egg you can. Then worry about the best way to withdraw it.

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