Home » Investing » Dividend Stocks » Retirees: Use This Simple Trick to Supercharge Your CPP Payments
A covered call strategy and shares of TransAlta Renewables (TSX:RNW) are all you need to generate some eye-popping yields.
About
Latest Posts
Nelson Smith
Nelson is a dividend value investor who insists on buying great dividend-paying companies when they are reasonably priced. He has been investing for more than 15 years and is now primarily focused on helping other investors build up a dependable stream of passive income. When he's not studying the markets, Nelson can be found relaxing with his wife and cat or watching the Toronto Blue Jays.
The financial media loves to report stories of folks who are very ready for retirement –the kinds of people with nest eggs comfortably into seven figures.
But unfortunately for millions of Canadians, these stories are the exception, not the norm. Many Canadian savers are woefully unprepared for retirement. These people aren’t bad, it’s likely they just spent their cash on other priorities like paying off the house or helping out their children.
The default solution for folks without much retirement capital has always been high-yield stocks, the kinds of companies that pay a 6% yield or more. But these stocks are risky, and they don’t tend to provide much in capital gains because they’re paying out all their earnings to shareholders.
There’s a better solution. Here’s a simple trick you can use to really supercharge the income you receive from a stock, a perfect solution for a retiree without enough cash. Let’s take a closer look.
A covered call strategy
You won’t see it covered much in the financial media, but a covered call strategy is one of the easiest ways for investors to earn sustainable 10%, 12%, even 15% yields.
Here’s how the system works. The first step is to buy the underlying stock. There are certain stocks that work really well for this strategy, like higher dividend payers that offer monthly payouts. We’ll use TransAlta Renewables (TSX:RNW) as an example for this article because I like the company’s focus on greener power generation, it has nice growth potential, and it trades at a reasonable valuation.
Once you’ve purchased the underlying stock, it’s time to venture into the options market. Derivatives get a bad rap because traders can use them to make incredibly leveraged bets on stocks, the kinds of ideas that pay hugewhen they work out. The vast majority of the options market is way less exciting.
The next step is to sell a call option, which gives you income immediately in exchange for creating a sell obligation on a specific date. This is when it gets easier to use a real-life example, starring TransAlta Renewables. The $15 November 15th call option last traded at $0.07 per share. Or, if you’re feeling a little bearish, the $14 call option on the same date pays $0.40 per share. Remember, shares currently trade hands at $14.25 each.
The $15 call option trade has two outcomes. The first one is ideal. If the stock trades below $15 at the end of trading on November 15th, you get to keep the premium and the option expires, worthless. The other outcome is the stock rallies above $15 per share and you’re forced to sell your shares at $15 each. This isn’t such a bad outcome either; you’ve made $0.70 per share in capital gains and you’re free to keep the option premium, too. Not bad for holding just under two weeks.
More income?
The beauty of using a covered call strategy with monthly dividend payers like TransAlta Renewables is you also receive a nice income boost from the dividend alone.
Remember, Renewables pays a succulent $0.07833 per share monthly dividend, a payout that works out to a 6.6% yield. The ex-dividend date is November 14th, meaning you’d qualify for November’s dividend.
A covered call strategy is essentially like getting two dividends for the price of one. You’re looking at a $0.14833 per share income source each and every month you do this trade. That works out to an eye-popping 12.5% annualized yield.
That’s how powerful a covered call strategy is. You’ve essentially doubled your income with just a few mouse clicks. And since TransAlta Renewables is a pretty boring stock, you don’t have much risk of shares rocketing higher and ruining the trade.
The bottom line
Anyone can use this simple strategy to really supercharge their income, but I bet it’ll be especially popular with retirees looking to get a little extra from their savings. It’s the perfect CPP supplement.
To qualify for the maximum, you must not only contribute to CPP for 39 years but you must also contribute 'enough' in each of those years. CPP uses something called the Yearly Maximum Pensionable Earnings (YMPE) to determine whether you contributed enough.
Use your statement of contributions to get your pensionable earnings for each year then divide that amount by that year's maximum pensionable earnings. Next, you multiply that amount by the average maximum pensionable earnings for the five-year period leading up to the year when you intend to start drawing CPP.
For 2024, the maximum monthly amount you could receive if you start your pension at age 65 is $1,364.60. The average monthly amount paid for a new retirement pension (at age 65) in January 2024 was $831.92. Your situation will determine how much you'll receive up to the maximum.
The Canadian Pension Plan (CPP) will soon undergo adjustments that will affect anyone who earn more over a specific threshold. The maximum wages for these persons that are covered by the CPP are expected to increase by 4% in 2024. In addition, there will be a 7% increase in the second earnings ceiling over the first.
There are a few reasons for this, with the main one being that it's not easy to maximize your contributions during your working years. Another factor is that many Canadians apply for the CPP prior to age 65, resulting in a reduced monthly benefit.
Doing so means a 36% permanent reduction in your monthly benefit, but that's still money in your pocket today. The maximum payment amount for taking CPP at age 65 is $16,375.20 per year (2024). That amount would be reduced to $10,480.13 per year if you elect to take CPP at 60.
The maximum annual CPP retirement benefit is $16,375 as of January 2024. If you don't qualify for the maximum, enter the percentage here. Your breakeven age is 75. If you don't expect to live past 75, you may be better off taking CPP benefits at age 60.
Employee and employer CPP contribution rates for 2024 remain at 5.95%, and the maximum contribution will be $3,867.50 each—up from $3,754.45 in 2023. The self-employed CPP contribution rate remains at 11.90%, and the maximum contribution will be $7,735.00—up from $7,508.90 in 2023.
Under the Canada Pension Plan, a Survivor's pension can be paid to the person who, at the time of death, was the legal spouse or common-law partner of the deceased contributor. Benefits can also be paid to the surviving children of the contributor.
Your CPP retirement pension counts as income and is taxable. Taxes aren't automatically deducted. You can ask that federal income tax be deducted from your monthly payments by: signing into your My Service Canada Account, or.
The Canada Revenue Agency oversees the administration of these financial supports and verifies that applicants are Eligible for $1,400/Month Extra OAS 2024. An upcoming $1400 Old Age Security (OAS) payment enhancement for 2024 has been announced by the department, which is housed under the Canada Revenue Agency.
Canada Pension Plan Death Benefit (CPP/OAS) Seniors|Income and Financial Support The Canada Pension Plan offers a death benefit, up to a maximum amount of $2,500, to be paid out if the deceased has been a CPP contributor.
The Guaranteed Income Supplement (GIS) is a monthly payment you can get if you are 65 or older. The Supplement is based on income and is available to Old Age Security pensioners with low income. It is not taxable. In many cases, we will let you know by letter when you could start receiving the first payment.
The amount of CPP benefit is based on how much you contributed during your working years. To maximize this amount, make contributions for a minimum of 39 years between 18 and 65 – and also contribute the maximum allowable amount for 39 years. This maximum amount is set by Canada Revenue Agency.
Canada Pension Plan (CPP) rate increases are calculated once a year using the Consumer Price Index (CPI) All-Items Index. The increases come into effect each January, and are legislated so that benefits keep up with the cost of living.
To do this, you would typically need to have worked for many decades and paid the maximum CPP contribution each year. As with OAS, CPP payments increase with every year you delay drawing it after 65 (CPP increases by 8.4% for every deferred year, to a maximum of 42% extra at age 70).
Introduction: My name is Kerri Lueilwitz, I am a courageous, gentle, quaint, thankful, outstanding, brave, vast person who loves writing and wants to share my knowledge and understanding with you.
We notice you're using an ad blocker
Without advertising income, we can't keep making this site awesome for you.
