How I built my dividend portfolio…and how you can too

Inspired by my friend’s post, which I’ll link to at the end, you might already know from my site I take a two-pronged approach to investing:

  1. I own 30+ companies from Canada and the U.S., companies that reward investors through consistent dividend payments every month and quarter, most of them increase their dividends every year, and,
  2. I own a few low-cost Exchange Traded Funds (ETFs); these funds provide diversification and near-market returns.

Why dividend investing?

Not everyone loves dividends like I do but that’s OK.  Personal finance is personal.  Some financial gurus claim index investing is the greatest thing since sliced bread and any desire to buy what you know makes no sense whatsoever.  I disagree.  There are many reasons why I love dividend investing, as part of total investing return.  Here are just a few of them:

  • Dividends are easy to understand. I invest, I stay invested, and I get paid for doing so.  Pretty simple.  It’s tangible money I see coming into my account every month.  It’s money that grows over time thanks to reinvested dividends. It’s money we can use (eventually) to pay for any expenses we need.

Dividends 2017

  • Dividends can help fight inflation. As consumer prices rise, as the cost of living rises, the companies that deliver our products and services rise along with them.  Many of companies I own have a habit of increasing their dividends over time given they are making more cash every year.  Some companies are making so much cash they can afford to raise their dividend every year.  When was the last time you worked, did nothing, got paid AND got a raise in the same year?
  • Canadian dividend paying stocks are tax-efficient. With my RRSP full of mostly U.S. assets, I tend to keep Canadian dividend paying stocks in my TFSA and inside my non-registered account.  In a taxable account Canadian dividend paying stocks are eligible for a dividend tax credit from our government.  This means taxation on dividends are favourable, it is a lower form of tax; lower than employment income and interest income.

Dividend Tax Credit 101

Why index investing?

As much as I love dividends I know the future is always cloudy.  Dividends while expected are never guaranteed.  Nobody can predict the financial future with any accuracy.  Besides, dividends are just part of an investor’s total return.  This is why for extra investing security and in hopes of long-term capital gains I index invest the rest of my portfolio outside of Canada.  There are a few reasons why indexing is a great way to invest, these key ones are important to me:

  • With indexing I don’t have to worry about any dividend stock selection.  Should I own Fortis or Emera?  Should I own TD Bank or Scotiabank?  I let the product do the work for me.  Via indexing I can own hundreds or thousands of stocks from around the world for a few bucks per month in fees.  That brings me to point #2.
  • Owning thousands of stocks from the U.S. can cost less than $100 per year for every $100,000 invested.  That’s peanuts.
  • Transparency rules.  With a few clicks of a mouse, I can look up the holdings, cost structure, distribution information, tax information and long-term performance of my ETFs.

Why the bias to dividend paying stocks?

Dividend investing, if executed well has the potential to deliver market returns AND sustainable income.  I love the idea of passive income – it helps me stick to our financial plan.  I also have the potential for capital gains for many of my stocks I own.  That’s win-win.

Here’s how I’ve gone about building my dividend portfolio to date…and how you can too…

Step #1 – Consider using dividend metrics

Passive dividend income is great but sustainable (long-term) and rising dividend income is even better.  This means I don’t just blindly buy companies that pay dividends.  I use a few metrics to screen for my portfolio holdings.  Here are some popular ones:

  1. Dividend growth and dividend history. I like companies that tend to grow their dividends every year.  I also like companies that have paid dividends for decades or generations.

What stocks have paid dividends for generations?

You can also start your screen from Canadian and U.S. dividend champions or aristocrats.

iShares CDZ is a Canadian Dividend Aristocrats Index ETF.  It holds Canadian companies that have increased their ordinary cash dividend every year for the last five years.

Here’s a source of U.S. dividend champions/aristocrats, challengers and more.  Typically, U.S. dividend aristocrats have increased their payouts to shareholders for the last 25 consecutive years.  I recall at last count there were about 51 or 52 such U.S. companies in that list – which is updated every year.

  1. Dividend payout ratio. I like companies that aren’t sacrificing all their cash to reward shareholders.  Therefore companies that have a modest payout ratio are companies I tend to focus on.
  2. Cash flow. I have an affinity to companies that grow their earnings and cash more over time.  Here is a simple example below; Royal Bank.

RBC Cash Flow Image courtesy of TMX Money.

  1. Modest yield. I think this is one of the easiest metrics to use.  This metric is a measure how much a company pays out in dividends as a percentage of its share price.

Calculation: Annual dividends / price per share = yield

Example: BCE annual dividends = $2.40 / $60 = 4%.

I think you want to own companies that have a low-to-modest yield.  We prefer owning companies that yield between 3-5%.  Our holdings include Canadian banks, utilities and telecommunications companies and more.  When it comes to yields – higher yields (anything over 6%) could be warning sign for trouble – they are a concern for me anyhow.

Beyond common stocks there are also Real Estate Investment Trusts (REITs) you could own.  Here is a primer on REITs. 

Step #2 – Consider owning what the big fish own!

Beyond the metrics above, here’s the obvious:  consider owning what the big mutual funds and ETFs own.  If these stocks have been good enough for a multi-billion-dollar fund for the last decade or more they might be suitable for you.

Canadian dividend stock selection still made easy

Step #3 – Consider diversifying by sector

Even if owning all the Canadian banks stocks might have seemed like a good idea in the past, it may or may not be as fruitful in the future.  Again, the future is always unknown.  So consider diversifying your dividend paying stocks across various industry sector – including industry leaders in those sectors.  Here is the sector breakdown of the TSX using iShares ETF XIC as a proxy for the broad Canadian market:

XIC ETF

Image courtesy of BlackRock.

This means your Canadian stock portfolio may include a few companies in each sector:

  • Financials such as banks (examples: Royal Bank, TD Bank) and life insurance companies (examples: Manulife, Sun Life) and more.
  • Energy companies like Suncor and Canadian Natural Resources; energy distribution companies such as Enbridge or TransCanada or others.
  • Material (and Resource) companies like Potash, Barrick or others.
  • Communications companies like Bell, Telus and Rogers to name a few.
  • Utilities companies like Fortis, Canadian Utilities, Emera, Brookfield Infrastructure Partners, Algonquin Power and many more.

You get the idea.

Full-on disclaimer alert!   Such a list above could be your starting point for your investment research and portfolio considerations.  Even though I may own some of these companies above this list is not a recommendation for any purchase.  Your mileage may vary!

Here is the sector breakdown of the biggest 500 companies in the U.S. market:

IVV ETF

Image courtesy of BlackRock.

The same principles to Canada can also apply to your U.S. stocks.  You can consider owning the top holdings in each sector or further still, focus on the sectors that Canada is largely deficient in (e.g., information technology, health care, consumer discretionary) and invest in those to diversify away from Canada.

Although I own a few U.S. stocks I have a bias to owning indexed ETFs within our portfolio to own hundreds of U.S. and international equities for a low fee.  I personally feel our Canadian market is very concentrated and dominated by a few companies.  The U.S. market is more balanced and more difficult to select stocks accordingly.

Why don’t you just own dividend ETFs?

With all this talk about individual stock selection and holding some indexed ETF products, then why don’t I just own dividend ETFs?  Great question and I’ve answered this a few times on my site, most notably in this post.

To summarize here are the key reasons why I don’t own Canadian dividend ETFs at this time:

  • Some dividend ETFs have criteria I don’t fully agree with.
  • Most dividend ETFs have a modest fee, I prefer not to pay it.
  • I cannot control the stock weightings using a dividend ETF.

Full-on disclaimer alert #2!   Your investing objectives including your risk tolerance are probably not the same as mine.  Therefore you might want to consider dividend ETFs or other ETFs for your portfolio.  Although I find the concentration of the Canadian market easier to select and hold stocks from I’m personally considering owning more U.S.-listed ETFs, namely U.S. dividend ETFs in my future.  Your mileage may vary!

You can read about some of my top U.S. dividend ETFs for your portfolio here.  (I hope to post an article in the coming weeks about some U.S.-listed international dividend ETFs for your portfolio.  Stay tuned friends.)

Summary

Many years ago I decided to ditch the mutual fund industry and begin my DIY investing journey – in the quest of more passive income and less money lost in avoidable money management fees.

Six years ago – switching from mutual funds to ETFs

I believe we’ve done well to date.  Years ago my wife and I decided to hold a number of Canadian stocks directly for passive income, own a few U.S. dividend aristocrats for U.S. income, and then own a few U.S.-listed ETFs for extra diversification.  We remain committed to that plan today – one that has seen our portfolio grow to over $500,000.

But we’re far from done yet…

One of our big financial goals is to own a one million dollar portfolio someday for an early retirement.  It’s certainly a dream-like goal but we are getting closer to it.  I believe we’ve been successful to date because we have a solid savings plan in place for investing, we’ve developed a plan we could stick to, and we have done so for many years.  Meaning:  plan the work, work the plan.  We’re halfway to realizing our early retirement dreams at the time of this post.  Thanks for reading and I look forward to your comments as we continue the second half of our journey.

Inspiration:  Million Dollar Journey – How to build a dividend growth portfolio 

Got any questions about our long-term goals?  Our progress to date related to our portfolio building journey?  What about the changes we are considering including owning more U.S.-listed ETFs over time?  Comment away – I’m happy to answer any questions.

Mark Seed is the founder, editor and owner of My Own Advisor. As my own financial advisor, I've grown our portfolio from $100,000 to well over $500,000. Our next big goal is to own a $1 million investment portfolio for an early retirement. Come follow my saving and investing journey by subscribing to my site. Delivered by Subscribe Here to My Own Advisor

24 Responses to "How I built my dividend portfolio…and how you can too"

  1. Looking back on our investing journey I see that we did what you are basically doing. Albeit not in such a planned out way. We started with MFs and about 16(ish) years ago started investing in individual companies moving way from MFs. Now the only funds we have are the TD e-series to complement our stocks and park small amounts of cash that is not DRIPped. We do have DB pensions so that comes into play big time.

    About the only thing I’d mention (and I know you already know this Mark) is that there will be corrections along the way so extrapolating what has happened in the past is not likely what will happen in the future. Be prepared for, if not setbacks then at least stagnation of dividends. There was a period where there were not a lot of dividend increases and in fact several decreases were announced combined with a substantial drop in share prices. It can be scary for those not prepared.

    Reply
    1. Upon re-reading the article I see you did mention the potential market and dividend fluctuations. Don’t know how I missed that on the first read. Or maybe I did read it and just forgot by the time I got to the end. 🙂

      Reply
    2. We also have pensions but those cannot be touched without MAJOR penalties until age 65 for me. That’s another generation away 🙂

      Your point about stagnation might come true. I’m not always counting on dividend increases, although if they happen they will certainly accelerate our financial wealth. I’m prepared for stocks to drop 30%. In fact, I expect it at some point like 2008-2009. I hope I have money to invest when that happens and I will do my best to stay the course. Buy, hold and stay invested. Thanks Lloyd.

      Reply
      1. 2008/2009 was 50% drop !!

        Who knows when the shoe will drop next and how heavily?

        I will also do my best to stay the course.

        Good overview for dividend and indexing investment junkies.

        Reply
          1. I use the delusional thinking that if the “value” of our portfolio were to fall by (insert percentage here), we’d still have more than what we originally put in.

            (I did say it was delusional)

        1. RBull: Many were 50%, especially banks, but some like FTS and ENB were 20%-30%. Regardless, I was fortunate to buy, though most were not at the low. Still I got a real boost to my total income.

          Reply
          1. Good for you Cannew.

            We’re speaking about the overall market and not individual stocks. Some were more than 50% and some were less of course. I was also fortunate to be in the buying stage of my investment path so had some benefit, as I expect many on here were too.

            In any case the market overall came back within a few years, and those that held on were rewarded, whether through dividends or capital growth.

  2. Hi Mark,

    in the dividends chart, does that include all your accounts? TFSA, RRSP, Non-reg? Wondering becuase if you plan on retiring early with $30k dividends a year there may be tax issues with RRSP accounts.

    Reply
    1. My focus is on TFSA and non-reg. accounts = $30k in dividend income per year every year. Once we hit that mark, we’ll start drawing down our RRSPs. Our RRSPs are not included since we intend to draw down those accounts prior to any pension plans from work. What tax issues do you mean? Any RRSP withdrawals will count as income and we’re hoping we withdraw our RRSP funds when our income is the lowest possible.

      Reply
  3. Cool article Mark. You have covered where to look for dividend payers, and what you use to review individual companies. I would be curious to read an individual stock analysis on your part. And also review your portfolio holdings, when you are comfortable to share with us 😉

    Reply
    1. I’m getting more comfortable with time as you can see 🙂 I will eventually disclose my holdings I think but if you read often enough and dig enough, I suspect you’ll find out with some accuracy what I own. Just not how much but again, readers can do some math on that – I can’t make it easy for people!

      Reply
  4. Another good article Mark. But don’t be afraid to step on a few toes. Rather than just say own a few of each I’d add in Bold, AVOID CYCLICALS!!!! I don’t say one can’t make money investing in cyclicals, but the topic was Dividends (I prefer the word Income) and most cyclicals don’t fall into my category of being ones with good dividend histories. Most cut their dividend as soon as their price drops.

    Reply
    1. LOL. Well, I do own SU. I’ve learned to avoid most of them cannew, thanks to reading about the experiences of you and many other successful dividend investors.

      Reply
  5. Nice post Mark! As you know I’m a pure dividend value investor. Here are my reasons for avoiding ETFs, and index funds:

    1. ETF/Index funds inadvertently buy overvalued stocks. I choose to only buy undervalued stocks.
    2. ETF/Index funds inadvertently buy lousy stocks. I choose to only buy stocks that satisfy my 12 rules of investing.
    3. You’re still paying fees. I chose to pay the lowest fees possible…..$9.99 per trade and I can hold the stock for 20 years 🙂
    4. Index funds buy non-dividend stocks. I only buy dividend stocks (one exception: BRK.B)

    Reply
    1. Great to hear from you. I hope all is well?

      Undervalued stocks are a bit subjective – otherwise – you wouldn’t have to have your own criteria 🙂 That said, I know what you mean, fund managers are usually forced into buying and selling. They are paid to do it!
      http://www.myownadvisor.ca/in-defense-of-active-investing/

      The other thing I totally agree with you on though is fees. But, if you are going to own ETFs, own low-cost ones and ones that are diversified.

      BRK.B is practically an index fund 🙂

      Reply
  6. Great article Mark. Timely for us as well. We are right where you were 6 years ago having just moved away from MFs and starting, albeit somewhat late, our DIY journey. Advice seems to come at us from everywhere so I am thankful for your blog. It’s informative without being salesy. We appreciate that. Now that all our money has been transferred into our own hands, I’m sure I will have lots of questions moving forward. Hope you’re up for a little Investing for Newbies 101in the coming weeks! Thanks for the great stuff you impart. We remain big fans.

    Reply
    1. Thanks Lee. Well, I feel like I messed up royally in my 20s with MFs. Ah well, live and learn.

      Now, it’s all about holding many Canadian blue chip stocks, a few U.S. stocks and then U.S. listed ETFs for extra diversification. I think we’ll keep our portfolio this way for many years to come, if anything, we’ll own more U.S. dividend ETFs for income – to use that income to withdraw from our RRSP – likely $10k each per year starting around age 50.

      Happy to get your questions and emails. Everyone learns from someone. Cheers.
      Mark

      Reply
  7. Hi Mark,
    Do you ever sell any stocks if your capital gains may be taking you over your % asset allocated to that one stock. Ie if you wanted a weighting of 5% but share price increases to the point that this particular stock is now 8% would you trim back to 5%?
    also, for your TFSA…. do you have a specific % you may hold in one particular stock ?

    Reply
    1. Nope 🙂 I buy and hold. I focus on keeping any one stock or ETF to less than <10% of portfolio weight across all our accounts. I think my highest right now might be 6% weight and I’m OK with that for now.

      I rebalance my portfolio by buying assets, not selling. I’ll touch on rebalancing a bit in my next dividend income update.

      I’ve modeled my Canadian stock portfolio after iShares XIU and XEI ETFs.

      Inside my TFSA I have a bias to holding more Canadian REITs. I have the same rule there, <10% for any one asset.

      Thanks for reading.

      Reply

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