Grow Together - December 2023

In this issue: President's Message | Dividend stocks: the gifts that keep on giving | Giving is what makes a life | Novel ways to give back in the season of giving

 

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President’s Message

Matt Evans, CFA
President & CEO

 

Time, treasure and talent. This nicely alliterative concept is commonplace in the world of philanthropy. We all have at least some of each to give. While some can offer a little (or a lot) of all three, others are blessed with more of one or another.

Giving is part of our theme for this issue of Grow Together, and a fitting topic as I write during the week of U.S. Thanksgiving. In addition to unofficially opening the holiday season, this has become a notable week on the calendar for fans and followers of the world’s most iconic investor, Mr. Warren E. Buffett. Each year around U.S. Thanksgiving, Mr. Buffett announces the annual portion of his lifetime pledge to donate 99% of his Berkshire Hathaway shares to a charitable trust.

With a personal net worth north of $120 billion USD, Mr. Buffett has accumulated a lot of treasure. His gift this year of 2.4 million BRK.B shares was worth more than $865 million USD. To date, he’s donated shares worth more than $50 billion – which is more than 100% of his personal net worth at the time of his original pledge in 2006. By the time Mr. Buffett’s pledge is met to donate most of his remaining shares, his lifetime charitable contributions will likely exceed $100 billion.

What was notable in Mr. Buffet’s November 21st donation announcement was his characteristically straightforward assertion that, “being rich does not make you either wise or evil.” He frames this ambiguity by pairing two of his personal beliefs: first, dynastic wealth is not, on the whole, desirable; and second, capitalism is a wonderful system for creating it. He credits most of his own good fortune to the luck of being born in a certain time and place, and the rest to those wonders of capitalism.

 

Mr. Buffett’s profound commitment to charitable giving may help reconcile the moral tensions that – for some – can accompany extreme prosperity. Even if this is the case, the trust and his charitable gifts also happen to be pragmatic and sensible tools to reduce the tax burden on Mr. Buffett’s estate. We explore these strategies later within this issue.

We’re all free to choose our own path to a lasting legacy, and free to make choices for our own reasons. For my part, we give from our family’s time and treasure to United Way. We make an annual financial contribution, and I donate time as co-chair of the Major Gifts Cabinet with the United Way Alberta Capital Region. Why United Way? We’re compelled by the mission to provide pathways out of poverty. We’ve seen the direct positive impact of United Way programs for communities in need, including the profound difference it can make for children living in poverty. Giving back is our way to reconcile our personal good fortune with the fact that North American society delivers, in Mr. Buffett’s words, “vast disparities in wealth… somewhat capriciously to its citizens.”

No doubt, financial pressures are elevated today. We all feel the pinch of inflation, and it’s increasingly difficult for young people to enter the housing market due to a combination of rising prices and higher interest rates.

The notable increase in living inheritances we’ve observed within our client families is a natural outcome of these circumstances. It’s the front-end of the multi-trillion-dollar intergenerational wealth transfer the developed world has been on the cusp of for decades. Conventional wisdom held that this phenomenon would play out through the traditional form of inheritance (i.e., the passing on of estates). But the range of financial pressures faced by young adults today has accelerated the process.

Through personal experience and our work with affluent families across Canada, we know that giving within the family and philanthropy are each extremely rewarding experiences. We’re always pleased to support our clients’ giving priorities through comprehensive planning and professional investment management, and we’re proud to share specific insights on these matters in this issue of Grow Together.

As always, and especially during the holiday season, we’re grateful for the time you will spend with us here.

 

Dividend stocks: the gifts that keep on giving

Gil Lamothe, CFA
Head of Canadian Equities, Senior Portfolio Manager

We like to think of our Canadian dividend strategy as the proverbial goose that lays the golden eggs. That gifted goose keeps on giving, provided you don’t need it for your holiday meal!

With the recent sharp increase in interest rates, many clients are asking the question, “Why should I bother investing in a 4.5% dividend portfolio when I can safely get 5.25% in a term deposit?” The answer to that strikes squarely at the heart of the nature of magical creatures we know as companies that consistently pay and grow their dividend.

Let’s briefly look at the apparent alternative, the GIC or term deposit. This goose lays eggs of the same size for a pre-determined length of time. Once the time is up, you have to buy another goose in a market that might well have significantly lower interest rates. So much for the gift that keeps on giving. This re-investment risk is often overlooked when considering the attractiveness of GICs in the current environment.

By contrast, our Canadian dividend strategy generates a stream of income that’s not only consistent, but grows from year to year. The goose that lays larger and larger golden eggs. For investors looking for income that is demonstrated to provide inflation protection as well as an improved standard of living over time, this strategy is an effective answer. We’ve been measuring and recording the characteristics of our Canadian dividend strategy since 2006, and there has yet to be a year where the dividend growth wasn’t positive. Even in 2009, during the Global Financial Crisis, the portfolio’s average dividend grew 0.9%. The average annual dividend growth over the past ten years has been 6.5%. Now think about that for a moment. On average, your goose’s egg was 6.5% larger every year, and it continues to lay eggs. Now that’s the gift that keeps on giving!

Let’s look at a working example. Assume that the current dividend yield of our Canadian dividend strategy is 4.8%. An available five-year GIC is 5.2%. For the purposes of this comparison, we’ll assume you can re-invest the GIC, in five years’ time, at the same 5.2% rate. Over the next ten years, under those assumptions, your income flows from $1 million invested in each would look like what you see in figure 1.

Figure 1: Growing dividends vs. fixed GIC income

Source: CWB Wealth

Even assuming that dividends grow at only 6.0%, although there’s initially less income from the dividend fund versus the GIC, the growing dividends soon begin outpacing the stagnant GIC income. By year 10, there is $29,000 more income flowing from the dividend portfolio, and the GIC is now once again facing re-investment risk.

If we adjust for inflation, the results are even more compelling (see figure 2).

Figure 2: Inflation adjusted income streams

Source: CWB Wealth

In this case, the GIC income loses purchasing power every year, while the dividend income actually continues to grow and outpace inflation. By year 10, the dividend portfolio is generating $23,000 more of inflation adjusted income annually.

It’s worth mentioning that our Canadian dividend strategy will also grow its capital over time. Companies that consistently increase their dividend are, by definition, generating more and more distributable cash, and are usually rewarded for this in the market with a higher and higher stock price.

One good example of this in our Canadian dividend strategy is Fortis, a Canadian utilities company. Fortis has consistently increased its dividend for two decades. Since 2013, the company has increased its annual dividend from $0.31 per quarter to $0.59 in its most recent quarter (see figure 3). That’s a near doubling of the dividend in that 10-year period and the stock price has followed suit, climbing from $30.45 per share to recently closing over $56.00 per share. Keep in mind that GICs held to maturity do not see any capital appreciation.

Figure 3: Fortis dividend increase over past decade

Source: Bloomberg

One further benefit to dividends is the beneficial treatment of dividend income relative to interest income by Revenue Canada. A dividend tax credit is available for dividends distributed by Canadian companies. Please speak with your advisor to learn if a dividend investment strategy may be right for you.

We view our Canadian dividend strategy as a great solution for long-term, income-oriented investors.

The power of growing dividends provides a hedge against inflation, and very quickly outpaces the seemingly attractive returns of GICs.

They’ve also demonstrated capital appreciation over time. For our clients, they truly are the gift that keeps on giving.

Sources: CWB Wealth, Bloomberg

Giving is what makes a life

Bernadette Churchill, MBA, CIM^®, FEA  
Private Wealth Advisor, Portfolio Manager, CWB Wealth Partners

“We make a living by what we get. We make a life by what we give.” - Sir Winston Churchill

Many of us work throughout our lives to not only earn enough to support our family’s lifestyle, but hopefully provide more. In doing so, we continuously decide how to spend or save what we earn in order to maximize living a good life. When approaching our retirement years, or perhaps even earlier, estate planning and inheritance play a bigger role in our decision making, as we look more to how we can further enrich the lives of others.

What we earn, or are given, not only supports our family lifestyle but has the potential to generate a nice nest egg through investing and savings. In sharing this nest egg with others, our life can be enhanced and made more complete. Gifting while you’re alive, known as a living inheritance, is a new trend worth considering as it lets you see your gift’s impact on the life it touches. There are several ways to give, and it’s important to understand the financial and legal consequences when you do.

 

Impacting a life

Traditionally, we think of an inheritance as being given after the death of a loved one. But there may be confusion or negative feelings when your loved ones learn of your wishes through the reading of your will. Additionally, you won’t get to see how your gift has impacted them.

A living inheritance gives you a front row seat to watch how your gift enhances their lives, and helps ensure that your wishes are executed as intended.

Your gift can help loved ones through a rough patch or allow them to realize a goal or dream. For example, your daughter may have a lifelong dream to visit the seven wonders of the world and you could help her with a trip to India so she can explore the Taj Mahal. Imagine the joy you would feel as she tells you about the amazing journey, while sharing breathtaking photos. You will have given her memories that last a lifetime.

Alternatively, perhaps your newly graduated grandson or a nephew with a young family is stressed by the increased cost of living and, in particular, the cost of housing. The increase has squeezed their disposable income and they’re finding it hard to cope. In these situations, you may consider helping not only with a down payment, but also contributing to mortgage payments as needed. Given the current environment, this is a scenario that we’re seeing more often these days. Several of our clients feel that helping their children in this way eases the burden of housing and can relieve stress, so they can excel in other areas of their life.

You could take an extreme approach to the living inheritance strategy and aim to die without any assets. Theoretically, you’d retain enough to ensure that your retirement needs are met while having given what you’d like to each of your heirs and to your desired charities. Whatever remains would be used to create memorable life experiences, with the aim of leaving your estate with nothing at the end of your life.

Whether you take a more conservative approach to giving while living, or a more dramatic approach and decide to use it all up before you die, it’s important to understand your present and future needs so you can realize your final wishes.

Ways to give

Giving a lump sum of money may seem like the most logical way to fund a living inheritance, but there are other ways to satisfy this goal.

A monetary gift could also be given through monthly or annual payments, or by using a more sporadic approach.

One benefit of making frequent but smaller gifts is that you’d still be in control of the money, and if an unexpected expense arose, it could help. Also, by keeping most of the money invested, it could continue to generate additional returns.

Alternatively, assets such as a vacation property, family business, family home, heirloom jewelry or a work of art can be given. Distribution of such assets may require thoughtful conversations with family members to determine the best recipient fit and ensure there are no hard feelings. This is something that your advisor can help facilitate if needed.

Regardless of the asset itself that you’ve chosen to give, when a transfer occurs you’ll need to understand the legal and tax consequences.

 

Financial and legal considerations

Currently, there’s no law restricting the number or size of gifts that you can make during your lifetime to your heirs. Furthermore, distributing certain assets while you’re living could create some tax advantages for you. But before you deliver these gifts, you should know exactly how your future and present financial situation will be impacted. Questions to ponder include why you want to make these gifts, what would be the timing of them, and how will it impact your current finances and future retirement.

Consult with your financial advisor, lawyer, and accountant to confirm that your retirement and any other obligations are adequately funded, and that potential tax consequences or legal issues are understood. Completing a financial plan with your advisor will give you a good idea of what your estate will look like under certain conditions and assumptions. This will help ensure you’re making sound gifting decisions that can meaningfully impact your life, and the lives of those you touch.

Novel ways to give back in the season of giving

Jen Schmid, MPAcc, CA, CFP, R.F.P.

Private Wealth Advisor, Financial Planner

Another holiday season is just around the corner and with it comes reflections on what it really means to us as human beings. It can be a time of healing, renewal, love, tolerance, and kindness towards others. More than just an excuse to decorate our houses or drink eggnog, it’s also a time to pause and be thankful for the people and things we have. In doing so, we might find ourselves wondering how we can show appreciation and give back to our families, friends, communities and to those less fortunate than us.

Besides pulling out your wallet and dropping a $20 in the Salvation Army collection bucket on your way into the grocery store, there are some novel ways you can accomplish your giving goals this season. Here are a few that you may want to consider.

 

Dash the cash – gift in kind

Donating cash to your favorite charity is probably the simplest way to give, but did you know there’s an incredibly tax-effective way of gifting to charities instead? This is done by donating securities to charities instead of cash – called gifting in kind.
Many registered Canadian charities have brokerage accounts by which to receive shares of publicly traded companies, units of mutual funds or units of ETFs, so it can be a relatively simple process to transfer an equivalent amount of shares to the charity in lieu of cash.

The advantage to donating in this way is that you avoid paying tax on the capital gains associated with the shares you donate, plus you get the value of the donated shares as a tax credit via the donation slip that’s issued from the charity – it’s a double dip of tax savings!

 

Set up a foundation

Setting up a foundation might sound daunting, but the process can be made quite simple by partnering with an organization that allows you to set up a foundation account. Your advisor can help you source a reputable one. By establishing a customized foundation account (also sometimes called Donor Advised Funds), you can cut out much of the administration, legal fees and time associated with setting up a private foundation. You can also create a long-term funding base to support your favorite charities’ immediate needs, while leaving a lasting legacy.

 

Give the gift of time

A gift doesn’t always have to be money to make meaningful change. Rather, a gift of your time, effort or expertise can be just as effective and significant as opening your wallet. Volunteering can be a great way to give back to a cause that has special meaning for you. And because many not-for-profit organizations or programs couldn’t run without volunteers, it makes your gift of time important. You could stuff baskets, collect donations, or drop off meals to elderly residents in your spare time. Or consider lending expertise to charitable organizations by sitting on their Board of Directors and guiding their vision for the future.

 

Align your gifting with your business

If you’re a business owner, you could consider aligning your gifting with the industry you operate in. Do you own a restaurant business? You could donate meals to a local shelter or to an organization that distributes surplus food to those in need. Are you in the clothing retail business? Donate your clothing to thrift stores. Do you have an accounting or tax practice? You could volunteer tax preparation services to families that cannot afford to have their returns prepared, or to newcomers to Canada who are unfamiliar with our tax regime. It’s easy to take what you do every day in your business and give back in that way to meet your gifting aspirations.

 

Leverage your assets

Maybe donating money or time aren’t good options for you at this time. Don’t worry. There are still ways to make an impact by leveraging the assets you might already have. For example, you could get a significant tax break by donating a painting, sculpture or other item to a museum or charity as a gift or under a certification as cultural property.

Alternatively, you could apply to several different programs to have your cottage, rental property, second home, or unused spare room in your current home rented to Canadian newcomers or refugees for either temporary or long-term housing until they’re able to find their own accommodations and employment in the country.

You could also gift any type of real estate property, whether it’s vacant land or commercial property. Keep in mind that there may be tax implications for doing so. For example, if you donate land or interest in land that’s ecologically sensitive (eco-gifts), you can create a protected space that endures in perpetuity, providing a significant legacy for you and your family. And the best part is that eco-gifts receive tax treatment superior to most other charitable gifts.

The holiday season isn’t just about the presents under the tree, it’s about bringing people together, regardless of their beliefs or traditions and fostering gratitude, hospitality, and generosity. The above novel ways to give back show how you can care for others in small gestures or large deeds, and every way in between.

Our Private Wealth Advisors have aided many families in choosing a method that works for their specific situation to fulfill their philanthropic and gifting goals. Whether it’s helping set up a foundation account, research into partnering organizations or if you’re simply unsure as to where to begin, we can help.
 

Information presented herein is for discussion and illustrative purposes only and is not a recommendation or an offer or solicitation to buy or sell any securities. Views expressed are as of the date indicated, based on the information available at that time, and may change based on market and other conditions. Unless otherwise noted, the opinions provided are those of the authors and not necessarily those of CWB Wealth or its affiliates. Investment decisions should be based on an individual's own goals, time horizon, and tolerance for risk. Nothing in this content should be considered to be legal or tax advice and you are encouraged to consult your own lawyer, accountant or other advisor before making any financial decision. Quoted yields should not be construed as an amount an investor would receive from the Fund and are subject to change. Investors should consult their financial advisor before making a decision as to whether mutual funds are a suitable investment for them. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments.

Please read the prospectus, which contains detailed investment information, before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. CWB Wealth uses third parties to provide certain data used to produce this report. We believe the data to be accurate, however, cannot guarantee its accuracy. Visit cwbwealth.com/disclosures for our full disclaimer.