How to start investing in dividend paying stocks

Over the last few months I’ve received a number of emails from readers on this question:  how do I start investing in dividend paying stocks?

Today’s post will begin to provide some answers on that subject and hopefully give you some things to think about as well.

Stocks 101

Wouldn’t you love to own a company (or companies) without ever having to spend a day at the office?  It can happen and does happen for many investors.  Owning stocks can be a great wealth building tool.  Stocks can also destroy your portfolio if you are not wise about your decision(s), you are not diversified, and you let your emotions run a muck when buying or selling stocks.  A stock represents a stake on a company’s assets and earnings. As you acquire more stock, your ownership or stake in the company becomes greater.  This can be a very good thing – just Google Warren Buffett and read up on that guy.

Dividend Paying Stocks 101

You might already know from reading my site a company’s assets and earnings can be managed in many ways:

  • Management can decide to reinvest earnings and grow the business.
  • Management can decide to buy back shares so each remaining share can earn a higher proportion of profits.
  • Management can decide to pay down debt.
  • Management can decide to pay some of their earnings to shareholders in the form of dividends.

Many people, including myself, invest in dividend paying stocks for the expectation to get paid from the company’s earnings, so they/I can decide to reinvest the dividends to purchase additional shares of stock or do something else with the money.  For example, when money makes money, that money can be reinvested to make more money.  Companies that pay a consistent dividend are typically demonstrating good financial health although dividends from companies are never guaranteed.  Dividends from companies can be increased (good), dividends can be paid at the same rate (OK), dividends can be cut (can be good and not so good) or dividends can eliminated all together (can be great and very bad).  All this to say; companies that generate consistent (and rising) cash flow are probably good companies to own because there is the expectation you’ll be rewarded as a shareholder.

Is there a list of those companies available to pick from?  Yes!  Lists are published all over the internet everyday!  However there are three places where you could start looking.  Remember I said start looking not blindly buying.

Hunting Dividend Paying Stocks

Source # 1 – Consider owning what the big dividend mutual funds own

I posted this article on my site some time ago and it remains relevant.   Check it out.

Source # 2 – Consider owning dividend “aristocrats”

Aristocrats is a broad term referring to a certain, higher standard of social class.  This term has been associated with some stocks as it relates to their consistency and longevity paying dividends to shareholders.

Here are some Canadian and U.S. stock lists:

The keen readers out there will notice the U.S. “aristocrat” criterion is different than the Canada one.  Off the top, only a few companies in Canada have raised their dividend every year for multiple decades, equitable to U.S. aristocrat status:

In fact, Fortis raised their dividend late last year and Canadian Utilities raised their dividend earlier this month. Companies like Canadian Western Bank (CWB) and many others have been consistently raising their dividends for 10, 15, and 20 years.

Now, do all stocks labelled as “aristocrats” make for great long-term investments?

I don’t know.  Honestly, I don’t know.  I do know based on the histories of these companies they have been good dividend payers in the past so in hindsight, the investors that expected to get paid, did.  Remember what I said above:  companies that pay a consistent dividend are typically demonstrating good financial health although dividends are never guaranteed.  Past performance is never indicative of future results.  You know this if you’re a Toronto Maple Leafs fan!   Kidding aside, the future is always cloudy including the financial one and picking individual stocks make your investing risks higher.

Source # 3 – Consider owning what the big Exchange Traded Funds (ETFs) own

When I look at XIC, VCN and a few other big name ETFs that cover the broad Canadian equity market I see these holdings consistently in the top-10 or top-20 year after year:

  • Canadian banks and insurance companies (financials).
  • Canadian railways (industrials).
  • Canadian telecommunications companies (telecommunications).
  • Canadian energy companies (energy).

Think Monopoly, the game, for Canadian investing:  banks, railways, energy and utilities.

When I look at VTI (or VUN, it’s Canadian cousin), where VTI is a massive ETF that covers thousands of U.S. stocks, I see these holdings at the time of writing this post in VTI’s top-10:

  • Apple
  • Exxon Mobil
  • Microsoft
  • Google
  • Johnson & Johnson
  • Wells Fargo
  • Berkshire Hathaway (Warren Buffett’s company)
  • General Electric
  • Procter & Gamble
  • JPMorgan Chase

You may recall Apple just started paying a dividend but Berkshire does not and likely never will based on their shareholder policy.  Again, a company’s assets and earnings can be managed in many ways.

How to start investing…

To buy and build your dividend paying stock war chest I suggest you open a self-directed Tax Free Savings Account (TFSA) and/or a self-directed Registered Retirement Savings Plan (RRSP).  Self-directed accounts like these allow you to buy a number of different assets actually not just individual dividend paying stocks.  You can hold cash, bonds, ETFs and more.  This way, if you decide to invest in indexed funds later, you can.  There is more on indexing in a bit.

I’m focusing on these accounts for you today since I think investors are wise to maximize their registered accounts, like these ones, before investing in a non-registered, taxable account.   I mean, why pay taxes on investments if you don’t have to?

  • TFSA = no tax deduction with after-tax contributions, and tax-free dividend income from investments. You can read more here.
  • RRSP = claim tax deduction for account contributions, and tax-deferred dividend income until withdrawals occur. You can read more here.

For what it’s worth I try to buy my dividend paying stocks when they are close to 52-week price lows AND I have enough money to invest in the first place.  Those are just a few of my criteria.  The latter is not easy (saving up the money) and the former watching stock prices takes time and effort.  On that note this is just one reason why indexing is so great.  You don’t need to watch the stock market or try and hunt for deals.  My friend Preet Banerjee put it best:

Preet Banerjee - Indexing

Preet is very smart guy so you should listen to him.

Which brings me back to this…should you invest in dividend paying stocks?

That’s your decision.

Are there risks?  Absolutely.

Could you underperform the market as a dividend investor?  For sure.

Could you outperform the market as a dividend investor?  Maybe but the odds are against you.

Are there benefits of getting paid to be a shareholder?  Yes.  It will be nice to (eventually) own some companies and never go to work.  But you can diligently save and invest using indexed products and get to the same retirement promised land, maybe faster and with less risk by indexing.  In the end only you can decide (potentially with your trusted financial advisor) if investing in dividend paying stocks is right for you.  There is much more to the stock investing process than what I wrote above.  Hopefully today’s post provided some how-to information for you to get started and things to consider.

What’s your take on investing in dividend paying stocks?  Are you an indexer instead?  Do you have a hybrid approach like me?  Share your story in a comment.  

24 Responses to "How to start investing in dividend paying stocks"

  1. Like anything else there are risks. Thanks Mark for putting this together it’s a wealth of information for someone like me who wants to get involved. Where does one open a self-directed TFSA? Is there a certain amount you have to invest to buy?

    1. Thanks for the comment Mr. CBB.

      Personally, I wait until my transaction costs are <0.5% before making purchases. Too many transaction costs will be a drag on portfolio value and returns. The same applies to buying ETFs although some discount brokerages like Questrade in my sidebar offer commission-free ETF investing 🙂

  2. Hi Mark,
    I was 100% in dividend stocks but I am now leaning towards index ETF’ but not 100% convinced that ETF’s are the only way to go. I can’t stand the volatility of individual stocks. I know you are supposed to look at your portfolio in it’s entirety and I do, but I can’t stand seeing a stock drop 5% or 6% in a day and then go up the next day. I can easily handle an ETF dropping 2%. It’s all about the psychology of owing individual securities. The older I get, the more volatility seems to bother me.

    Large, blue cap stocks are the first to be sold in a market crisis because they are liquid and in most portfolios thus making them a little more volatile. You have to be prepared for this as a dividend Investor.


    1. You raise some interesting points John. Individual stock ownership can be emotional. I know when it comes to my holdings, I pretty much hold them through thick and thin. I think I’ve only sold 2 stocks over the last 5+ years and I’m glad I did. I put that money into indexed ETFs.

      I don’t mind when stocks fall in price actually, I like it. I didn’t used to but now I do. I simply buy more.

      I agree with you, you need to be prepared for volatility as an investor but this is less of an issue if you’re a) taking the long view and b) if you’re an index investor.

  3. I’m holding mostly individual stocks right now but am leaning toward getting some ETF’s for international exposure. To be a dividend investor you need to be comfortable with volatility. Heck you need to be comfortable with volatility if you’re investing in any stocks.

    1. For sure Tawcan, I was thinking the same thing when I wrote this post. You better detach yourself from stocks otherwise you’re going to be in for a rough ride. On that note, it will be interesting to see what investors do with COS tomorrow. I think their earnings come out Thursday.

  4. I’ll always invest in dividend stocks but there is some value in index investing. I’m working towards a hybrid strategy which involves some low cost ETFs and dividend stocks. The main problem I’m finding with a dividend portfolio is that they are a lot of work – research, constantly rebalancing etc. (not that I’m complaining!)

    1. I think I will as well Dan. I’m investing more in low-cost ETFs now that I’m “done” buying most of the stocks I want to own. I don’t find a dividend portfolio much work actually. At least now. Everything is pretty much on autopilot.

  5. Love your ETF dea of seeing what stocks are contained in them as a guide. I regularly skim offerings to see what they hold and weighting of each holding. I then cross reference with other similar etfs to compare holdings.

    As far as indexing, its a great idea even tho I dont own any. Do I plan to? Yes at some point. If I were to give advice to new investors I would suggest indexing as a starting point with a good corp bond fund to round it out.

    I like the fun of controlling the stocks I own. I may beat the market but I may not either.

    1. This is the struggle in owning stocks. Although I’m “up” against the index I don’t know for how long. This year with O&G stocks getting killed might be the first year I don’t beat the market. That’s not good. This is why I am indexing more. I won’t care what the market does or doesn’t do.

  6. I did something similar starting out as well, scoped out many banks mutual funds and ETF’s to get a baseline for what I would want to hold. From there I’v been slowly building it up. I also do hold 1 ETF position to slowly add to with extra cash/dividends when I can’t add enough capital to buy a stock position. Would also add to definitely take advantage of promotions when opening your first brokerage/trading account.

    1. Honestly, owning what some of the big bank funds and ETFs own is a viable way to go. Now that most of my stock portfolio is on autopilot I will be indexing more (and have, and will).

  7. Interesting article. I totally agree with you Mark. Indexing is an excellent way to invest regardless level of investor’s skill sets. Majority of my investment are held in ETFs. I have VTI and VCE but invest in individual stocks when I think they are undervalued.

    Thanks for the great article.


    1. I think for 99% of investors, indexing works. The other 1%, if they have long-term skill and luck they can consistently beat the market. I’m realizing this more than ever. I don’t think I’m going to sell any dividend paying stocks just yet but I am putting my hard earned money into indexed products more in 2015. This way, I figure I get the best of both worlds: passive income from existing stocks and capital appreciation from indexed funds.

      Thanks for your comment.

      1. The perfect balance is tough one as always but I totally agree. Indexing works very well and I wish more people that invest their hard earned money into mutual funds realize what a terrible mistake they are making.



        1. I think so. I know a few years back, I was very bullish and gung ho on all things dividend stocks. My understanding and experiences with investing have changed – I think a much better bet is indexing. I can still hold my existing stocks for passive income but I intend to index more for many reasons. I’m glad I have a hybrid approach still.

          Expensive mutual funds are just plain bad!

          Thanks for the comment.

  8. I used to be an indexer. Then I moved to 100% dividends. Now, I’m a mix of dividends with some ETF. That way I gain additional growth, avoid fiscal cliff, add diversification and I still don’t spend much time on them because I’m oriented towards long-term goals.

    1. I’ll eventually end up with some “explore” for my “core”, but the longer term plan for me is to index. It just makes too much sense not to have some indexing as part of a long-term portfolio.

  9. Just turned over a DRIP we setup for our grand daughter who turned 18. She will immediately open a TFSA with ShareOwner Investments (because they are the only broker who does Full Dividend reinvestment). She will transfer shares “In Kind” from Computershare to the TFSA.
    She plans to continue adding money, as much as she can afford, to the DRIP account and each year transfer some of the shares into her TFSA. As her income grows she may add additional DRIP stocks and increase her contributions. This process will eliminate all fees and probably not have to pay any taxes on the DRIP dividends.
    If she keeps this up, I expect she will be able to retire by 45 to 50. She’ll be able to live off the dividends (which will continue to grow), without depleting her capital and not pay any taxes on her TFSA withdrawals.
    How simple can an investment strategy get!

    1. 1. “She plans to continue adding money, as much as she can afford, to the DRIP account and each year transfer some of the shares into her TFSA.”

      2. “As her income grows she may add additional DRIP stocks and increase her contributions.”

      If she continues to do this for a few decades, she will be rather wealthy. Kudos to you for setting your grand daughter up for financial freedom.

  10. I’ve given her the following contribution schedule:
    Age Per Yr Savings Per Month
    18 To 20 $336.19 $28.02
    20 To 24 $416.11 $34.68
    25 To 30 $602.15 $50.18
    30 To 33 $1,398.04 $116.50
    34 To 36 $2,400.64 $200.05
    37 To 40 $3,577.15 $298.10
    41 To 45 $5,529.20 $460.77
    46 To 50 $10,579.38 $881.62
    If she can make the above contributions and the dividend growth rate is 3% per year, I’ve projected her dividend income at age 50 to be between $135,000 and $150,000 per year, which will continue to grow.

    1. Great schedule!

      I know in my early 20s, I was only able to save about $100 per month. I started saving $25 per month as a teenager.

      In my early 30s, I was saving on average about $2k per year. I’m now able to save more than that thanks to income increases.

      Somebody that young with that type of savings plan will be absolutely set Henry.


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