My Own Advisor

Welcome to my latest dividend income update.  For those of you new to these posts on my site, every month I discuss my approach to investing using dividend paying stocks and how reinvesting the dividends paid from the companies I own are helping me reach financial freedom.  You can check out my previous dividend income update here.

Thanks to the month of May, the S&P/TSX index is now in positive territory for the year, returning about 3%.  Before that, the market was running rather flat in 2013.  As an investor, I don’t worry at all about what the markets do over such a short time frame.  Remember volatility can be a friend of yours.  It can provide investors opportunities to buy stocks at lower prices although it’s tough to determine when these low prices are.  As a long-term investor I’m not worried about volatility in my portfolio since price fluctuations will always occur.  I’m focused on the big picture instead, a plan that extends out 10, 20 or more years out.

With that mindset I follow a simple recipe with our Tax Free Savings Accounts (TFSAs); save money, make contributions to it and make a purchase once every few months.  I made one buy over the last couple months when I thought the price was right for me in Telus (T).  We now have almost enough shares to DRIP this stock which should see the dividends reinvested every quarter to buy more shares automatically, free of charge.

After the tally for May was done, I calculated we’re on pace to earn about $6,940 this year in dividend income from our Canadian companies.  That will happen as long as the companies we own keep paying dividends and we continue to reinvest the money paid by them.  We continue to be a long ways away from our goal to use dividend income to pay for most of our retirement expenses but every month is a small step forward to that milestone.

I’ll be back with another update next month and in a future post, I’ll answer some frequently asked questions about my dividend income journey.  Until that article comes up you can read more about my investing approach here and here.

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Warren Buffett is recognized as one of the greatest long-term investors of all time.  Buffett has said many things about buying and holding stocks for the long run, but this is one of my favourite quotes from him:  our favorite holding period is forever.

How long should you and I hold a stock?

Buffett answered this question by saying if you don’t feel comfortable owning a stock for 10 years you probably shouldn’t own it for 10 minutes.  Sage advice.  ’m trying to follow that advice as much as I can.  For most part, unless my companies change direction dramatically and as long as they pay dividends, I’m holding them.  In some cases, I’m buying more of them automatically via dividend reinvestment plans (DRIPs).

How has this strategy worked out for me over the last few years?  Not bad actually.  My 28 Canadian companies are on target to pay out just over $6,850 in dividend income this year (an increase of $80 over last month) but I suspect the income might be more since I reinvest dividends often and I will likely make more contributions to our TFSA before December while other monies go towards lump sum mortgage payments.

Our dividend income is a critical component of our retirement plan so we can’t spend the dividends today.  Instead, it must be reinvested or at very least saved so we can buy new companies if equity markets decide to retreat a bit.  I can’t predict when markets might slide (I really have no clue if and when they will do) but I’m cheering for falling  markets since this investor likes to buy stock(s) at cheaper prices than today.  I don’t always get my way but once in a while my wish comes true.  Thinking about this wish reminded me of an article by Andrew Hallam, author of Millionaire Teacher who wrote this in the Globe and Mail about falling markets:

The notion that bad markets are good opportunities is a tough thing for inexperienced investors to get their heads around. They are often happy when markets rise. But as Warren Buffett likes to point out, this makes as much sense as celebrating the rising costs of groceries.

Hopefully many years into the future Andrew I’ll be celebrating the fruits of my labour after doing a few things very well:  holding blue-chip companies that pay dividends as close to forever as I can.

Friends of My Own Advisor, can this strategy work out for me in the long run?  What should I be mindful of with my dividend income strategy?

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Huh, March dividend income update?  But it’s almost May?

I know, I’m a little late with the dividend income update post but such is life.  Things get busy.  In the last couple of weeks…work has been very busy, we renovated a bathroom and painted our master bedroom at home, I took a week-long course in Las Vegas and I’ve been home long enough to pack for another trip.  The last three weeks have been a blur.

When you’re busy, time flies.  You blink and March becomes April which approaches May.  Thankfully, as fast as time seems to travel these days most of my investment portfolio doesn’t seem to go anywhere too fast – what I mean is – my portfolio travels at a rather boring and predictable pace upwards, plodding along, money making money thanks to my investment strategy.

You see, part of my investment portfolio is invested in indexed products.  Index investing works because while active mutual fund management might beat the stock market some of the time, most of the time it will fail; especially when fund money management fees are added to the equation.  Indexing on the other hand allows investors to capture the returns of the markets less miniscule fees, with very low effort and minimal risk.  So, as the markets and the indexes they follow go so goes my investment portfolio – which suits me just fine.  I figure if Warren Buffett has this to say about indexing over active mutual fund management then most of us should stand up and take notice:

“The best way in my view is to just buy a low-cost index fund and keep buying it regularly over time, because you’ll be buying into a wonderful industry, which in effect is all of American industry,” Buffett told a CNBC anchor.

“If you have 2% a year of your funds being eaten up by fees you’re going to have a hard time matching an index fund in my view,” Buffett said. “People ought to sit back and relax and keep accumulating over time.”

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The objective:  to provide long-term capital growth and passive income by investing in a diversified portfolio of dividend income-producing Canadian securities.

Part of my investment strategy:

1.  Own the same companies the big dividend mutual funds and ETFs own.

2.  Avoid money management expense fees.

3.  Reinvest most dividends paid each month and quarter to buy more stock using dividend reinvestment plans.

Some holdings the big dividend mutual funds and ETFs own:

PH&N Dividend Income Fund:

 

TD Dividend Income Fund:

BMO Canadian Dividend ETF:

My investment strategy when equity markets fall:  buy stocks.

My investment strategy when equity markets rise:  hold stocks.

My long-term goal:  $30,000 in passive income to help pay for retirement expenses.

Passive income earned in 2008:  $0.

Progress made towards passive income retirement goal:  22%.

The journey continues next month…  :)

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“Know what you own, and know why you own it.” – Peter Lynch, American business icon.

A new year brings new opportunities.  Opportunities to reflect but also plan forward.  In that sense, I’ve taken a few weeks to review my dividend stock portfolio to better understand what I own and why I own it.  What is the outcome of my review?

I think I’m in good shape.

I own companies that have been paying dividends for over 100 years.  I own companies that demonstrate an ability to increase their dividends over time, even when the stock market is sideways or just plain chaotic.  Is my portfolio perfect?  No, there are some risks associated with some of my holdings and I need to monitor them.  Is my dividend stock portfolio set-up for increasing income this year?  Absolutely.

For retirement expenses and to fight inflation down the road, I believe steady income and more importantly rising income is the key.  Retirement expert Daryl Diamond thinks so as well and recently eluded to the beauty of sustainable income in retirement in a recent Globe and Mail article, saying:

“You don’t have to get up and see what the stock market is doing in the morning because it’s not based on the value of your account.”

In that article, there was an option presented to readers to use monthly income funds available by the hundreds (if not thousands) from the mutual fund and exchange-traded worlds to establish your income machine.  These funds typically hold a mix of dividend stocks, government, corporate and high-yield bonds and, sometimes, preferred shares.  While this approach might work for some, I prefer to own any companies in these big mutual funds or ETFs outright where I can.  This way, in my taxable account, I can take advantage of the Canadian dividend tax credit to be more tax-efficient.  If I want to own different companies or low cost funds that distribute interest income, dividends, return of capital and capital gains I can use my TFSA for that.

So, where does this leave me?

After last month’s portfolio review, I decided to change, well, nothing.  In January, I let the dividends come in and they were reinvested as per usual.  Rather boring actually.  Yet boring is working quite nicely since I’m up about $100 over December’s dividend income update.

Since a new year allows me to look ahead, I’ve forecasted my dividend income by the end of this calendar year will be close to $7,500.  That’s a long ways from my ultimate goal but that goal is getting closer every month I stick to my plan.

I look forward to another year of sharing my portfolio updates with you.

How is your income portfolio coming along for retirement?  Are you in retirement, and using a dividend income portfolio to help fund your retirement?

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