As an investor I should never lose sight of the risks direct stock ownership can mean. Apple was a dud years ago and now look at this company, their “i” products are everywhere. Nortel, well, you know the story. Research In Motion (RIM)? The story has yet to be told but things don’t look promising long-term. There are definitely risks to direct stock ownership and who knows what the future holds.
I’ve learned making a bet on one company and expecting a windfall is foolish. For example, I used to play penny stocks as part of a get-rich-quickly scheme in my 20′s and I can tell you it doesn’t work, at least for me it didn’t. I lost money. Making a bet on a few companies is not enough to hedge equity market risk either. Thinking about Easter recently, that’s too few eggs in your basket. Trading? Forget it, that’s not investing in my opinion. Instead I believe great success can come from owning established companies outright, a bunch of them and rarely selling them. I believe buying, holding and building a diversified portfolio of companies that have a solid history of paying dividends can be excellent strategy for wealth creation. I believe in this approach so much I’m putting my money where my mouth is.
Over the last month or so, I picked up shares in Manulife Financial (MFC) under $13. That stock is now DRIPping synthetically every quarter, growing my dividend income. If I can’t determine what companies I should buy or the stock price isn’t right for me then I buy proven ETFs for part of my portfolio…and maybe I always will. This way, the diversification is already packaged for me. To this point, last month, I bought some XRE under $16. This purchase provided more diversification in Real Estate Investment Trusts (REITs) and keeps me around my desired asset allocation for this class. The yield for XRE is rather healthy as well, over 4.5%.
As of last month I now own 23 Canadian companies directly. Add in XRE for good measure and the portfolio is starting to take some shape; ownership in financial, material, energy and telecommunication industries. I’m starting to become diversified. With most of my RRSP tied up in broad-market ETFs like VWO and XBB that follow the equity and bond markets passively, and a few U.S. dividend aristocrats for good measure, I’ve chosen to invest predominantly in Canadian dividend paying stocks in other accounts. There is a great distance to go to reach my goal of 40 Canadian dividend paying stocks, DRIPping in my accounts with moderate diversification but I’m running in the right direction.
As of the end of March, after dividends were paid and reinvested wherever possible, our dividend income for the 2012 calendar year is now projected to be just over $5,500. We’ll hit this target in December 2012 as long as dividends aren’t reduced, dividends are reinvested and the companies we own keep paying them. Who knows, it might be even higher!
I’ll never be able to entirely set and forget my dividend investing approach but I really don’t mind. Dividend investing takes some active work but the dividends flowing into my account certainly don’t. It wasn’t always this way. Penny stocks, mutual funds and other approaches bombed and failed and I got burned. This approach coupled with my passive ETFs though, is definitely working to date.
Over time, whatever the future holds, the more companies I own that pay dividends the less I have to worry about where our retirement income will come from. Now that’s a story that looks promising long-term.