Fans of this site know I take a two-pronged approach to investing.
For one I use Exchange Traded Funds (ETFs) for a portion of my portfolio. I use ETFs and likely always will for these reasons:
- I can achieve market performance less miniscule money management fees,
- I can obtain great diversification amongst companies, industries and world markets, for those low-fees,
- I obtain get transparency, I know exactly what I am investing in and how the product (ETF) works, and
- The ETFs I own are easy to use; they are bought and sold on an exchange and trade like stocks.
Passive investing using ETFs takes the guesswork out of stock picking; which companies will excel or conversely might be duds in the future.
My second approach to investing, is investing in many blue-chip dividend paying stocks for income. I think this approach works for me for a few reasons:
- The income received from these companies is real,
- I can count on many of these companies to increase their dividends over time, helping to protect me from inflation,
- The approach, seeing the income and the capital appreciation from these companies, helps me stick to an investing plan I believe in.
This psychological factor is huge. Preet Banerjee likes to say personal financial success is 90% psychology and about 8% math. The missing 2% is a quirky reminder of the insignificance of the math.
Sticking with a plan I believe in is working for me. There are also other benefits of holding dividend paying stocks directly:
- I can control the portfolio turnover, or lack thereof, with a buy-and-hold approach for many companies,
- Dividend-growing companies tend to be solid performers so you get dividends and capital gains,
- Dividends might make you re-consider selling a stock at the wrong time, at the first word of bad news for an example,
- Dividends instill management discipline, you can read Warren Buffett’s 2012 shareholder report here for evidence of that, and
- For non-registered accounts if you’re lucky enough to fill up the TFSA and RRSP already, the tax rate on dividend income is lower than other forms of income.
I chose dividend investing for part of my financial plan because I wanted to count on companies paying more income each year. Dividend stocks provide no guarantees; companies cut dividends, change their Dividend Reinvestment Plans and in some other rare cases, cancel their dividends altogether. No investment is without risk. That said, I feel as long as diversify my stock selections across many companies, many industries and also countries, I think it’s a sensible income-oriented strategy for many investors.
What’s your take on dividend investing? Too much effort? Too much risk for potential market underperformance?