Let’s face it – stock picking – as those indexers tend to call it can be risky business, risker business than indexing at least. What I mean is the premise behind index investing is academically sound and has some benefits over dividend investing:
- Indexers can obtain market returns less minuscule money management fees.
- Indexing helps take the emotions out of investing.
- Indexers can get vast diversification, using index funds to own thousands of companies around the world.
- Indexers can simplify their investment portfolios, using three or four funds, index investors can invest similarly to major pension plans – they can have equity domestic and foreign components, and a fixed income component.
I recall investing guru and all around good guy Preet Banerjee wrote some time ago in an article “index investing and dividend investing both have cult-like followings” – how true – but these cults have more in common than differences. Dividend investors thinking and acting long-term are not unlike their rival tribe. Much like indexers dividend investors:
- Tend to buy and hold assets, and do not (should not) trade, and
- Tend to buy assets in different sectors for diversification over time.
Dividend investors can benefit from the psychological upside that comes with dividends, cold hard cash coming into their pocket stops them from turning into panic-stricken sellers when the market corrects or crashes.
To be honest, I think these strategies can co-exist, in blissful harmony (at least they do in my portfolio).
When it comes to Canada’s stock market, I believe you can select proxies from various Canadian sectors and use those top-stocks to buy and hold for your dividend income portfolio. After those stocks have been purchased, you can then passively invest like Preet recommends – index invest using low-cost Exchange Traded Funds (ETFs) to hold U.S. and international equities from around the world.
How would that look? Let’s look at some scenarios for your portfolio.
Own the biggest Canadian REITs
Using iShares XRE as an example, the top-5 holdings are: RioCan, H&R REIT, Canadian Apartments, Smart REIT, and Canadian REIT (REI.UN, HR.UN, CAR.UN, SRU.UN and REF.UN respectively). Last time I checked those holdings comprise over 60% of the assets in this ETF. By owning these top-holdings, this is largely a proxy for all Canadian REITs, so as these companies go so will this ETF and this sector. You can save yourself >0.60% MER by owning the stocks directly.
Own the top Canadian banks
Using iShares XFN as an example, the top-10 holdings are: 6 major banks, 2 major insurance companies and a few other large integrated financial companies. Last time I checked those holdings comprise over 80% of the assets in this ETF. By owning those companies directly, they are a proxy for our domestic financial industry. How these financials perform long-term will likely dictate how well your Canadian portfolio will perform – Canada’s equity market is comprised of almost 40% financials.
Own Canada’s biggest utilities
Using iShares XUT as an example, the top-5 holdings are: Fortis, Emera, Canadian Utilities, Brookfield Renewable Energy, and ATCO (FTS, EMA, CU, BEP.UN, and ACO.X respectively). These stocks make up close to 70% of this ETF’s assets. Unless you want to speculate more, you don’t need to look much further for Canadian utilities beyond these holdings.
Own the Telcos you love to hate
You know the names so I won’t list them. “Robellus” all pay tidy dividends, might as well be an owner of what you consume!
There are other stocks worth considering, such as Enbridge who has paid dividends for 63 years and TransCanada, who recently increased their dividend again, and other factors to consider, but I think you get the idea by now. By researching the top holdings in Canadian sector ETFs you can start building a solid domestic dividend income portfolio over time and go on to use worldly low-cost ETFs to build around these stocks for essential portfolio diversification.
What do you make of this strategy to buy and hold Canadian stocks and then index invest almost everything else?