Canadian retirees with no savings are certain to get financial support during retirement. There are the Canada Pension Plan (CPP) and the Old Age Security (OAS) programs to help Canadians lead a comfortable retired life.
While you can start receiving the CPP payments by the age of 60, the OAS can be availed at 65. However, it is not advisable to just rely on these retirement benefits. In 2020, the maximum CPP payout stands at $1,175.83, which indicates an annual payment of $14,109.36. The maximum OAS payment for retirees for the July to September quarter is $613.53. This means the maximum annual income (CPP and OAS) for a retiree comes to $21,471.
We can see that this amount will not be enough to match the standard of living, especially in large cities like Toronto or Vancouver. People approaching retirement need to create multiple income streams to supplement these pension payments.
This means you need to have enough savings in your bank account to ensure a steady stream of recurring income. While you can buy real estate and generate money from renting out an apartment, it is a capital-intensive strategy. Further, there is a chance that Canada’s housing market is in a bubble and can crash in the coming months.
But if you invest in fixed-income bonds, you will again have to allocate significant capital due to low interest rates. So, where do you invest right now to benefit from a predictable income stream?
Dividend stocks will supplement your CPP and OAS payouts
The current market sell-off has meant that dividend stocks are trading at a cheap valuation with attractive dividend yields. The forward yields of some stocks are three times higher than bond rates, making them attractive for value and income investors.
Dividend investing ensures liquidity compared to real estate, and it also requires less capital compared to fixed-income instruments. Further, quality dividend stocks increase long-term investor wealth via capital appreciation.
Investors can look to invest in dividend-paying stocks such as TransAlta Renewables (TSX:RNW). The stock is trading at $16.19, indicating a dividend yield of a healthy 5.8%. TransAlta is a solid long-term bet, as the world is poised to rapidly shift towards clean energy solutions.
The utility company is well diversified, as it owns 19 wind facilities, 13 hydroelectric facilities, and one natural gas facility. These assets generate 2,527 megawatts of power in North America and Australia.
TransAlta has long-term purchase agreements with industrial customers and public power authorities. This ensures cash flows will remain stable across business cycles, enabling the company to sustain dividends.
In Q2, the company’s adjusted EBITDA grew 3.6% year over year to $115 million while funds from operations and distributable cash flow were up 12.5% and 17.5%, respectively. TransAlta has forecast to distribute between 80% and 85% of cash flow to shareholders.
The utility business is recession-proof, which means TransAlta’s cash flows will remain stable, and it will be able to increase dividends over time. The company pays monthly dividends of $0.078 per share, or $0.94 per share on an annual basis.
According to a 2018 survey, the average retirement savings for Canadians is $184,000. So, if you invest this amount in TransAlta stock, you will generate $10,672 in annual dividends, or close to $890 in monthly payments.
The Foolish takeaway
Only a small portion of Canadians will receive workplace pensions. This makes it even more important to secure your retirement and start building wealth to achieve financial goals and generate passive income.
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Fool contributor Aditya Raghunath has no position in any of the stocks mentioned.