Why buy individual stocks at all?

This was the question investing expert Larry Swedroe recently challenged investors in this article here.  I agree with most of what Larry says, hard to argue with the evidence and his expertise, but there is one thing I’m still not convinced on. Let’s review what Larry said and I’ll share my thoughts.

Individual stock ownership provides both the hope of great returns (for example, if you were to early on discover the next Google) as well as the potential for disastrous results (you could end up with a significant holding in the next Lehman Brothers).

I agree. Individual stocks bring “hope of great returns” but there are no guarantees.

Here’s another great example that demonstrates the riskiness of individual stocks. While the 1990s witnessed one of the greatest bull markets of all time, 22 percent of the 2,397 U.S. stocks in existence throughout the decade had negative returns—not negative real returns, but negative absolute returns.

Another example about the risky play individual stocks bring.

Professor Richard Thaler of the University of Chicago and Robert Shiller, an economics professor at Yale, note that “individual investors and money managers persist in their belief that they are endowed with more and better information than others, and that they can profit by picking stocks.”

I have full confidence there are tens of millions of investors who are much smarter than I am.

Investors have the false perception that by limiting the number of stocks they hold, they can manage their risks better.

I agree.  This is why I invest in indexed ETFs where I can own thousands of stocks to complement my individual stock holdings.

Investors make mistakes when they take idiosyncratic, diversifiable and uncompensated risks. They do so because they are overconfident in their skills; they overestimate the worth of their information; they confuse the familiar with the safe; they have the illusion of being in control; they don’t understand how many individual stocks are needed to effectively reduce diversifiable risks; and they don’t comprehend the difference between compensated and uncompensated risks (basically that some risks are uncompensated because they are diversifiable).

You may have me here Larry. I consider my basket of 30+ stocks fairly ‘safe’ to earn passive income but potentially I should not.  I guess I need to look no further than Canadian Oil Sands’ (COS) dividend cut, close to 86% cut from the dividend over the last quarter as evidence.  This stock has taken a beating over the last six months. I have many other stocks that have been stellar performers (dividends and capital appreciation) but the COS experience has reminded me dividends are never guaranteed, capital appreciation for some individual stocks can fade quickly, and my crystal ball when selecting individual stocks is always cloudy.

Let me know your thoughts on Larry’s article.  

161 Responses to "Why buy individual stocks at all?"

  1. I understand the reasoning behind index investing. I am convinced that over a lengthy period of regular investing and rebalancing the program returns the best results, but…..

    What if your investing time frame is not 30+ years, or your investments are not averaged over time, but rather consist of periodic lump sums? In these cases the principle of cost averaging is lost, as is the smoothing effect of a very long time horizon.

    I am also concerned about the exit strategy. Since withdrawals would require the selling of capital, how would the performance of this strategy be affected by a market downturn at the beginning of one’s retirement? I do not believe that I have seen this issue addressed by proponents of indexing.

    1. You raise some interesting points Dan.

      For investors without a 30+ year time horizon, I would suspect some capital preservation is a key concern. This means lots of equities might not be beneficial although I can appreciate every investor is different.

      As for the “exit strategy” for indexing, I don’t think this gets enough attention. I know Dan Bortolotti wrote an article about this in a recent MoneySense edition but I know I’d like to see more of this as well. Withdrawals from equity markets at the wrong time could deplete capital very quickly which is why I would suspect most financial advisors recommend more fixed income products as you get older if you are using a total return approach.

      For now, I like my hybrid approach: indexing mixed with inflation-fighting dividend paying stocks.

      Thanks for your comments Dan.

    2. I think that problem can be solved with the “buckets and glidepaths” approach, where you keep 3-5 years worth of expenses in cash and maintain the rest of your portfolio in equities, an allocation which ends up actually increasing in retirement – http://www.boomerandecho.com/buckets-glidepaths-money-retirement/

      Also, Dan’s MoneySense article was brilliant and showed how a total return approach can be used to drawdown your portfolio in retirement – http://www.moneysense.ca/retire/selling-etfs-to-generate-retirement-income

      The trouble I’ve always had with the “live off the dividends” approach is that you have to save too much in order to create the desired retirement income. For example, you’ll need $1M or more saved in order to generate $40,000 per year in dividend income. Unless your goal is to leave behind a million-dollar estate to your kids, there’s no need to save so much that you’ll never have to touch the capital.

      1. Great comments Robb and thanks for sharing the link, you beat me to it. I did like what Dan wrote:

        “Granted, it would be ideal to live off just the dividends and interest from your portfolio, because if you never have to eat into your capital by selling investments, you’ll never run out of money.”

        The reality is, you need a bundle to pull this off, about a $1M portfolio as you state. Given we have no idea what the future holds, I would prefer to save reasonably and if I don’t have to spend capital until later in life, this is a good problem to have in my opinion. Who knows what the future holds for any of us.

        I appreciate the comment.

      2. It is too simplistic to think that a portfolio exclusively invested in dividend producing equities would be suitable for most people, unless they have a great deal of wealth. As you say, 1M for a 40K income at a 4% div rate. A blend of income streams seems to me to be prudent.

        The example about Mindy and her 600K relies on a number of good years and does not include any major or prolonged downturns. A 2008/9 event could put such a plan into a tailspin. Also, regardless of her moving the money into a laddered GIC, she is still required to sell capital. A comparison with a dividend strategy (yes it is simplistic) would see her achieve her 24K goal without capital loss.
        Ideally we would all be able to rely on a core income stream like a pension or an annuity (maybe the rates will be higher by the time I retire), and build around that. Perhaps a diversified investment strategy of blue chip dividends and
        indexes as I, and seemingly Mark, have been moving towards will work.
        Many egged many baskets….. or maybe I’m fooling myself.

  2. There is a lot of math behind a section of the quotes you pulled: “Investors make mistakes when they take idiosyncratic, diversifiable and uncompensated risks. … they don’t understand how many individual stocks are needed to effectively reduce diversifiable risks; and they don’t comprehend the difference between compensated and uncompensated risks.”
    Very few investors will ever really understand what this means.

    1. You are probably right Michael, I know you are. Larry’s article linked to this article here:

      It’s a deep technical read. I think to summarize Larry’s points: prudent investors don’t take more risk than they have the ability, willingness or need to take. I recall this theme runs through many of his books and articles. This is why passive investing is superior for most investors since, in his words: “..it guarantees that you receive market returns in a low-cost and tax-efficient manner…”. Thanks for your comment as always.

      1. It is funny how Larry Swedroe saw those papers are proof that indexing works. I guess to a man with a hammer, everything looks like a nail.

        Actually, the purpose of those papers was to prove that trend following works. This is one of a series of papers by Blackstar that tries to make a point for following a trendfollowing stock picking system. The system the papers show is to buy stocks at all time highs, and put a trailing stop.


        1. Great to hear from you DGI. Yes, Larry Swedroe is a devout indexer and while I can appreciate that, I fail to see why some individual “stock picking”, at least holding a diversified basket of 20-30 stocks (or more) is a bad thing. Maybe I am just too naive.

  3. We own 13 stocks and 2 bond ETF’s. I’m 68 and this is totally against all the rules the bloggers proclaim. We are able to live off the dividends and a small amount of our capital each year. If companies like Coke, JNJ, Walmart and our banks go down I guess we’ll be living in a cardboard box somewhere. I guess what I’m trying to say is I refuse to live in fear as many of our so called experts continue to hammer into our heads.

    1. Well, not all bloggers 🙂

      Personally, I think a (diverse) basket of blue-chip stocks is a good way to invest, either for income or for some capital appreciation. If your goal is to beat the market then I think that’s tough long-term with stock picking. I know, since my portfolio has a bunch of stocks and I’m just keeping up with the indexes. If your goal is some passive income, then I think holding that basket of blue-chip stocks is the way to go.

      It will be interesting to see how my investing approach changes over time, as I age. Thanks for the comment Gary, always great to hear from passionate investors regardless how they invest.

      1. “either for income OR some capital appreciation”. I’d prefer to change the “or” to an “and”. The rule I was referring to was the number of stocks which most bloggers adhere to “at least 20”. My other favourite blogger change his strategey to ETF’s from dividend stocks lately because he doesn’t have time to do research etc. Well thats what got me into trouble in the first place. I was running a business and let my bank advisor talk me into expensive mutual funds. 20 years of sh##ty returns and then I started reading blogs such as yours and realized I care more about my money than anyone. While I don’t always beat the indexes I’m pretty happy for the most part if I can stay even. Thank you very much for your forum Mark. It’s always nice to be able to exchange ideas.

        1. You’re right, I see income and/or appreciation from dividend stocks, but I certainly expect more of the former than the latter since I do see things at odds sometimes; get paid now or get paid later!

          I also had a few years of sh##ty returns via bank-sponsored mutual funds. Those products are long gone in my portfolio now. Only dividend paying stocks from Canada and the U.S. and a few indexed ETFs – that’s it. Rather simple.

          I’m more than happy to get index-like returns less a few minor money management fees each year on those ETFs I own. I figure 30+ stocks from Canada, most of the holdings that XIU has is a good stock “war chest”.

          Always happy to hear and read about others’ perspectives. Even if we disagree sometimes. I think that helps all of us learn.

          Cheers Gary,

    2. You’re ok living in a cardboard box? You’re being facetious, but it can – and does happen.

      CBC news just published an article that said there’s more people age 66 who are working full time than retired. And another 27% are working part time. Why? Probably because their investments crashed.

      I know someone who had to leave retirement and go back to work full time because their investments crashed. It’s not a hypothetical stiuation anymore.

      Living on 13 stocks means you think you can pick stocks better than the experts. And this has been shown repeatedly to be false. You can’t. Your 13 stocks can crash and leave you without that income.

      Blackberry. Nortel. Coke. Quick, pick one too-large-to-crash stock that hasn’t crashed yet.

      1. I wonder how many people are working full time (at 66) because they want to or have to Glenn? I suspect it’s a mixture? I know I want to work until my 70s but that also means I want to pick and choose what I want to do 😉

        Having to go back to work because their investments crashed I agree is a terrible thing!

  4. Larry routinely downplays dividend investing on Seeking Alpha. I am not surprised to see yet another article of his decrying stock picking.

    Here is my rebuttal.

    Yes the average investor should not pick stock. They should pick ETFs. But why strive for average? Why is investing the ONLY industry, job, hobby, activity that people are told to not try. To only be average and play it safe? Everything else in life is to study, learn, try.

    It really isn’t that hard to beat the market. You give yourself an edge.
    Avoid P/E 20 and higher companies.
    Avoid sectors that make up over 20% of the S&P (Tech in 2000 and Financials in 2008).
    Things like that will give you a long term advantage over the market IF an investor sticks to it.

    The true problem with stock picking isnt the stock picking itself. It’s investors letting emotion get in the way of their strategies.

    1. @PullingMyselfUp: You ask “Why is investing the ONLY industry, job, hobby, activity that people are told to not try”? The answer is because you have a choice available to you that doesn’t exist in other jobs and activities. Imagine that instead of playing a round of golf, you could just take the average score of the PGA players who play that day. You can have this average score without traveling to the course or even buying clubs. For almost all of us, we’d be crazy to turn down this offer (assuming we care about our scores). But this offer isn’t available for golfers. However, when it comes to investing, we do have this choice; we can buy low-cost index funds and get the average returns of all the pros at ultra-low costs. It’s not that you can’t improve as a stock analyzer; it’s that you can get the average returns of the world’s best stock analyzers without doing any work at all.

      1. Sure golfers can take averages… they can take a handicap and alter their score. But that is not my point.

        When a golfer goes out onto the course are they told don’t bother trying. You can’t do better then average so dont try.
        That is my point.

        1. @Pullingmyselfup: I got your point but you’ve completely missed mine. Golfers do not have the option of accepting the average prize money of the PGA golfers who enter a tournament. However, investors have the option of accepting the average returns of all investing pros. That is why trying at golf makes a difference, but trying at stock picking will leave almost all people worse off than if they just bought the index.

    2. You raise an interesting point about “striving for average”. When I think of average, I think of indexing to some degree but I also think of the active money manager whose compensation to put food on the table depends on trying to beat the index. I actually think the retail investor has an advantage here, they are not forced into buying or selling at certain points in time.

      To give yourself the edge, I think some homework is required, some luck is required and as you say an investor needs to keep their behaviours in check. Unfortunately most investors can only hope for 2 of 3. This is why I’m indexing a bit more myself. I feel fortunate to have made the calls I have in the past but I need to diversify to dilute the risk I’ve been taking.

    3. You are making the mistake of confusing average returns with markets returns. Indexing gives you market returns, which are far above the average returns of all investors, due to the higher costs of active managers and mistakes that individual investors make.

      I think that those who regard stock picking as a hobby should really consider finding a less expensive form of entertainment.

      1. If an investor treats their portfolio like a hobby for entertainment purposes only, as an amateur, would then they will get amateur results.

        When I say that investors can try to outperform I don’t mean haphazardly going all in without a strategy or going 100% individual stocks selection.

        I am just against the Larry Swedroe ideas that investors shouldn’t even consider it and would be wasting their time doing anything other than ETF investing.

        1. I think what Larry Swedroe is saying is that the evidence shows that beating the index is just so difficult that it is just not prudent to try. It’s not his idea or his opinion. It’s the overwhelming evidence in the financial literature.

    4. 3 reasons:

      1) A lot of people don’t enjoy doing the work that can lead to out-performing the market
      2) Trying harder can have negative returns – just being smart isn’t enough to beat the index when you’re in competition with the smartest people in the world. You need to either have an extremely rare insight or get lucky.
      3) The cost of failure can be in the hundreds of thousands of dollars

      If you are interested in doing the research that can lead to out-performing the market and you can manage the risks (although many investors who believe this don’t truly understand the risks) then stock picking may be a good choice for you. I believe the investors that fit this description are very rare.

      1. Richard: Now I do agree with your points. If an investor doesn’t enjoy the work that would be needed to try to beat ETFs then they shouldn’t. They can hopefully reach their goals without it. And I am happy there are ETFs available for those that want them. The more options for investors to meet the psychological profile of the investor the better.

        On your second point. Also agreed. Being smart doesn’t make one beat the indexes. Look at LTCM. The problem tends to lie more with an investors emotions getting in the way and ruining their portfolio.

        Great comments.

  5. A few points:

    1. “…passive investing is superior for most investors…”
    There is no such thing as “passive investing”. All buys and sells are active selections, even in the form of ETF and index funds. You might buy an S&P ETF thinking now you don’t have to pick individual stocks, yet that’s exactly what you have done — bought 500+ individual stocks that a group of other people have actively selected for you from the global equity pool. And that group of people will actively change your basket of stocks perhaps next year, most certainly in the next few (over the past decade, 50% of the S&P 500 has been replaced). If it looks active and sounds active…

    Do some active research to see how those companies dropped from the S&P fared against the continuing index, you’ll be surprised at how the board’s active selection is just as detrimental to your portfolio as your own active behaviour.

    You’d probably do better if you examined the index/ETF of interest and then simply bought the top 20% of holdings which, statistically, provide 80% of the return (as Swedroe states, “Just 25 percent of stocks were responsible for *ALL* of the market’s gains”; in the case of the S&P it was more around 2 percent). Perhaps “passive investing” should be re-marketed as “lazy investing”. But I’m heavily biased.

    2. “..it [passive indexing] guarantees that you receive market returns in a low-cost and tax-efficient manner…”
    You can NOT acheive market returns if you are incurring ANY type of costs or frictions. The only way to acheive actual market returns is to beat the market by the margin of costs, inflation, and taxes. The only way to beat the market is by buying something other than the market.

    3. “…inflation-fighting dividend paying stocks…”
    Over the past 55 years, S&P dividend growth beat inflation 60% of the time, and by just over 1% (before taxes). Dividends coupled with gains is certainly better than relying on growth alone, but they certainly are not a panacea and can be rendered moot if your timeline isn’t long enough. Take out those magic inflation-beating 6 years — out of 55! — and your dividends are merely preserving your purchasing power (if you spend the dividends). Then again, high inflation (a rise in assest prices) is exactly what you want for your stocks. Damned if you do, damned if you don’t.

    4. With well over 1,500 ETFs and index funds to choose from, exactly how does an investor remain “passive”? To further the original question, why buy individual ETFs at all? Using an exceptionally small handful of low-cost index/ETF options will allow an investor to buy into pretty much the entire global equity market: stocks, bonds, US, ex-US. If you don’t know what you are doing and/or are lazy, admit it, keep it simple, and you’ll probably get to keep your money, but you’ll never beat the market.

    1. Happy to keep the dialogue going SST, I appreciate it.

      1. “…passive investing is superior for most investors…” – I do believe this because most people I talk to, they either invest in high-priced (active) mutual funds or they can’t actually tell what active money management funds they own. You are likely in the minority SST regarding how you invest and the knowledge you have.

      When it comes to the buying the top 20% holdings for income, I’ve actually done this on the CDN side since our market is so small. So, I agree 🙂

      2. These are Larry’s words, not mine. I do believe less minuscule money management fees many investors can earn close to the long-term returns of the TSX and S&P 500 indexes and to meet their financial goals, this might be plenty good enough if their savings rate is high enough for long enough.

      3. Largely agree; dividends coupled with gains are great but not everything. Nothing when it comes to investing is guaranteed.

      Lastly, 4. ETFs are becoming more like mutual funds and I agree, most investors likely need help to sift through the marketing machine to select good products for their portfolios.

    2. @SST: “There is no such thing as “passive investing”. All buys and sells are active selections.” Also, there is no such thing as water because it always contains at least some impurities.
      “You can NOT acheive market returns if you are incurring ANY type of costs or frictions.” Also, you can’t buy a car because at least some of its molecules rub off before you receive it.
      You crack me up.

    3. SST, true you’ll never beat the market, but you will almost certainly underperform the market, unless you’re the next Warren Buffett.

  6. Laughing all the way to the bank, thanks. 🙂

    To include a slice of Swedroe’s definition of “passive”:
    “…once you make a decision to deviate from owning a total market fund, you are making an active decision…” Guess Larry doesn’t drink water, either.

    Larry also states, and which all financial sector marketers should heed:
    “People can find themselves fighting over issues that amount to nothing more than an issue of semantics. However, what really does matter in the end is whether you’re getting an investment that adds value to your portfolio…the definitions and terminology become irrelevant. What remains relevant is if you are paying a fair fee for the value received.”

    Data shows the majority of people are not acheiving market returns and not receiving fair value for the fees paid (cue “Money For Nothing” by Dire Straights).

    The emergence of free robo-advisor services is certainly a step in the right direction.

  7. I’m with Gary. I’m 62 and have been retired for 2 years and don’t have any company pension plan. My wife and I own 25 dividend stocks, 2 ETFs (FIE,ZWB), and 3 mutual funds. Our only bond holding is the PHN High Yield mutual fund. We completely live off our dividend income and are actually still saving and increasing our wealth.

    I guess it still remains to be seen how this works out over the long term but so far, so VERY good. I feel quite optimistic that living off dividend income will work and it sure is relaxing not having to think about selling anything. The only decisions to make are what to invest in with the extra new additional cash being generated from the dividends.


    1. Your portfolio sounds like where I’m headed Don: 25+ dividend stocks and ETFs for diversification. I don’t have bonds yet but I will likely need them at some point.

      Like you my hope is to minimize withdrawals from capital although I know this might be required at some point. I also feel very optimistic about living off dividend income, I simply need to save and invest more to get there.

      “The only decisions to make are what to invest in with the extra new additional cash being generated from the dividends.” – this seems like a great problem to have 🙂 Thanks for the comment.

  8. Hi Mark,

    I believe indexing makes sense while an investor is still working and has additional funds to invest. While in this mode, the goal of the investor is to increase his capital for retirement. To do this, the investor should probably avoid the Canadian market as much as possible. US, emerging markets, Asian and European markets will normally outperform Canadian markets. In my opinion, indexing is the easiest way to invest in these markets. As new funds are available, they can simply be added to the proper ETF with very little thought other than diversification.

    Once the investor retires his goals change to preservation of capital and income. This is when dividend investing becomes the preferred style of investing. You can set up your portfolio to obtain the income you require in retirement with relatively safe stocks. At this point in time the investor doesn’t care if he beats the “market”. All that matters is protection of capital and income.

    I wonder if someone who is doing both, is confusing current goals with future goals?


    1. I’m thinking like you John but I’ve also preferred to buy and hold stocks now, in my asset accumulation years.

      I would agree the goal of most investors during their working years is capital growth, as much as possible, and this switches to capital preservation in retirement. Indexed ETFs are a great way to get international diversification. I don’t think some ETFs are needed for our small, Canadian market, you can own the stocks directly.

      If I have enough capital in retirement to live from I won’t really care if I beat the market. Thanks for the insight.

  9. Between the wife and I we have a couple of dozen or so stocks (several DRIPed) and half a dozen convertible debentures in our RRSPs. Our TFSA consists of 2 ETFs and three stocks and we have some laddered GICs for emergency cash. The largest portion of our stocks are Brookfield products so they are fairly diversified in and of themselves. Most of the stocks in our RRSP were on the recommendation of our FA that runs it. This is obviously not diversified for many but with our future indexed pensions I don’t feel the risk to our position is all that great. There is a good chance we will not need any of the principle.

    I like ETFs but I also like holding some individual stocks in companies that make money off of me. Gives me a deluded sense that I’m getting something back.

    1. Hey John

      Very well said on the different goals. I didn’t mention it in my post but my goal changed from capital appreciation to income generation at the start of 2013 as I preparing for retirement. Fortunately, I had terrific timing as my shifting coincided with the market over-reaction to a potential interest rate hike. The dividend stocks were taking a major spanking as I was buying them so I got many of them on sale.


    2. Like you Lloyd we DRIP about 20+ stocks. I have others I can’t DRIP yet but I will be investing in those so I can!

      Brookfield is nicely diversified and I’d like to own more of them actually.

      With my pension I also feel I can take some risk, meaning, I hold 100% equities. I like dividends because it’s tangible, I can see the money come into my account and I can spend it without touching the capital. Appreciation, although not guaranteed, needs to be realized.

      Thanks for your comments.

  10. Some interesting comments from Larry Swedwroe, (whom I follow somewhat), and from the posters on here. Some things I agree with and some I don’t.

    After about 35 years of DIY investing experience, I can say 100% market returns are plenty good for me, especially if there is little work to achieve them, (beyond the efforts to generate the actual investing cash itself.) I had some years I beat the market with my blue chip dividend payers approach, and periodic trading but plenty where I did not, and killed lots of time and effort in the process. It’s hard to ignore the facts that most professional managers (let alone retail investors) cannot beat the market with any degree of consistency whatsoever. Knowing what I do now I wouldn’t hesitate for a second to have bought general market index ETFs and let them run. I would certainly have been better off for it now, along with having accomplished that with a highly enviable lack of effort.

    For me some worthwhile benefits with ETF’s are a simplified portfolio re purchasing, balancing and making withdrawals in retirement, exposure to international markets, and of course generally greater diversification at low cost.


    1. Your experience is an asset Deane and I thank you for sharing your learnings. I would agree that market returns are plenty good for most investors, if not all investors 🙂 The quibble I have with indexing is, it’s hard to spend the cash flow from it. The math tells me I need a bigger nest egg to assure passive income vs. dividend stocks. For example, $1M invested with indexed products will provide about $25,000 (give or take) in passive income without touching the capital. I can have the same $1M invested, in about 30-40 stocks, and it should yield closer $40,000 per year and I still don’t have to touch the capital. If you own enough blue-chip stocks you can hedge some risk for reward.

      I’ve read about a total return approach but you need to take on bond risks and interest rate risks as well. This isn’t very appealing to me especially right now. Will I change my mind and become 100% indexed? Maybe someday but not now 🙂 Thanks for the detailed comment Deane.

      1. Mark,

        I understand the argument with higher dividend payers vs an index strategy that combines FI investments- a total return strategy (which I utilize). As you know, typically bond and interest rate risk help to offset the risk with equities . I also have a small portion of my equity where I currently own 3 stocks that satisfies my small urge to actively participate (explore) in the market.

        I accept there is a very good argument for a hi yield blue chip equity approach. However, having lived through $500K+ paper losses in equities the 5 years prior to retirement, the risk associated with having 100% of our financial assets in a single asset class doesn’t work for us. Drawing only higher paying dividends may help mitigate capital draw down in the same way as a cash wedge/FI overall cash flow strategy does. However until one lives through several large shocks with significant equity holdings it’s hard to describe the feeling; and this approach tends to limit investors more to NA equities with the possibility of a long term downturn where dividends may be cut/eliminated, affecting index & divvy holders alike.

        There is likely no right answer since at different intervals in time one approach will seem better than another. And of course everyone’s risk tolerance and goals are different. There is also no reason why a strategy cannot change and be implemented at a later date.

        The best fall back is to have a projected cash flow much greater than what your basic needs are so when bad things happen there is a safety net for years, if needed.

        1. Good to hear from you Deane. “There is likely no right answer since at different intervals in time one approach will seem better than another.”

          Yes, and for now, our strategy is working but I can appreciate I need to index more. I’ve seen parts of my portfolio drop about 50% which is not good but I’m holding through thick and thin. I figure this is good preparation for a future living off dividends and ETF distributions.

          This is where we’re headed: “…to have a projected cash flow much greater than what your basic needs are so when bad things happen there is a safety net for years, if needed.” Thanks for the wisdom!

          1. Hi again Mark. You’re welcome.

            You’ve got one of the most focused plans I know about.

            I’m very sure you’ll do well and your readers are certainly benefiting from sharing your experience and their own ideas.

            I should have added that ideally a person would have multiple income streams to provide additional diversity and safety throughout retirement.

          2. I’m quite geeky at times Deane and so is my wife, when it comes to planning and structure. When it comes to our income streams we should have a few in retirement so I hope I’m taking your advice: 2x pensions + 2x RRSPs>RRIFs + 2x TFSAs and more excluding government benefits. Maybe if the blog takes off this will be a nice part-time job 🙂

  11. That brings up an important point about owning individual stocks — Canada has exceptionally favourable taxation rules regarding dividend income. What’s the tax-free limit, $50,000?

  12. Hang in there Mark, you’re doing just fine. The “negative nellies” hate it when someone has the audacity to even try to outperform the markets (or median investor).

  13. Interesting read and love the comments! Stock Picking, Beating the Market, Diversifying, Asset Allocation…etc. etc. That’s what most people believe investing in stocks is all about, and for most maybe so. I tried for many years to do all of it successfully and failed. Certainly I would have been better if the current ETF’s and Index options were available & I chose to follow that route. And as many have said, it may well be the best choice for many to avoid the mistakes so many investors make.
    The problem is most people don’t really learn much about investing before they plunk down their money. Too often they have a friend or hear about someone who always seem to be making a bundle picking winners. Even those who read the wisdom of successful advisors and decide to stick with Americas Finest, Dogs of the Dow, Dividend Aristocrats, even Indexing, can’t help Buying & Selling to try and beat or match the market.
    However, having said the above, I don’t like ETF’s. Fees are fees regardless how small and matching the market is not something I’m interested in. I’m not proposing a solution and as Mark has commented many times, “There is no one solution for everyone”. I just know that when I discovered dividend growth investing and followed the strategy for many years (I’m now 74) and over the years reduced my holding to a core of 19 stocks, with only 2 US (of which I’d still like to get rid of two), with no mutuals, etf’s, bonds, preferreds, or GIC’s, that not only has my income grown to the point that it is currently two times our yearly expenses, and we reinvest about 60% of the dividends so our capital continues to grow (as does the income). I haven’t watched or compared our portfolio performance to the market for years, why would I care. It’s the income my portfolio generates that matters. Only 19 stocks and 17 Cdn. Some will say the risk is not only high but dangerous especially with a 7 digit portfolio. Maybe, but if these companies failed, even half of them, than we’ll all be living in a cardboard box.
    Five Stars to Gary, PullingMyselfUp, Richard, SST, Don & Lloyd

    1. I think, although you’ll never know because you can’t go back in time, if you invested in some low-cost iShares or Vanguard products for the last few decades, your portfolio would likely be very similar to what it is today, maybe more – who knows. This is because an equity total return approach is virtually guaranteeing you the best odds that your portfolio value will be as high as possible.

      Now, because we cannot go back in time, there is nothing wrong with what you have accomplished – it’s rather remarkable actually – that you can have 19 stocks (17 CDN and 2 US) with no ETFs, no mutual funds, no bonds and no preferreds churning out more income that you’ll ever need.

      I would agree with you, if our top-5 CDN banks, top-3 utilities in FTS, EMA and CU, our telcos like BCE, RCI.B, and Telus; in addition to energy and pipelines like ENB and TRP all go belly up – we’re doomed in this country.

    2. cannew,

      Nicely done! My investing style is very similar to yours but I’m roughly 2/3 Cdn 1/3 US dividend growth stocks with 40 positions overall. I’m 65, retired and still reinvesting the dividends for now but plan to start distributing in a couple of years. The beauty of dividend growth investing is the ability to live off the generated income without ever having to sell anything. Nice to hear from you, thanks for contributing!

      1. Bernie, congrats and that’s great as you know – “…still reinvesting the dividends for now but plan to start distributing in a couple of years. The beauty of dividend growth investing is the ability to live off the generated income without ever having to sell anything.”

        Bernie, a thought since a few readers have been so kind to share their investing stories with me. Would you do the same? I hope you would consider that. Let me know – thanks!

          1. Mark, I’m not used to writing articles but I do get long winded at times, with my comments…lol, especially when I’m relaying my analytical work. I like to look at different investing styles and often do back test compatibles. I’m not into writing a complete article but I’d be open to answering a list of questions from you for your blog. I’d prefer if you hold off for a while though as we’re getting our house ready for sale right now. We’re planning on a move to BC in the coming months.

          2. Bernie, no problem. It’s an open invitation. I’m just thinking you have lots of offer in terms of advice. Let me put together a list of questions for you and if you get around to it, and get inspired over the next few months, great – you can send your answers back 🙂

            I have your email address on file based on your blog comments so I have your permission to use that, I will email you something in the coming weeks.

            Again, thanks for the consideration.

        1. Agreed Cannew! Most dividend growth investors do keep to themselves, hence the scarcity of articles covering the strategy. But I find it hard to resist commenting when I’m told I can’t possibly be doing well with DIY stocks.

          1. Bernie, no one is saying you can’t possibly be doing well with DG stocks – it’s just that you could be doing better with passive indexing! But more importantly, you are best to go with the strategy you are most comfortable with.

          2. Hi Bernie: How much more Passive could we get. We don’t Buy & Sell, just Hold, Hold, and Hold, reinvest our dividends, at no cost, and watch the dividends grow as the companies increase them. Oh, and we don’t have to pay a growing annual fee (regard less how small it is – for my portfolio it would cost between $6,000 to $8000 per year) for doing nothing!

          3. Grant, it’s certainly possible I could do better with passive indexing going forward with respect to performance but highly unlikely with respect to income generation. If you’re referring to performance since initiation of my DGI portfolio in late June of 2008, there is no way indexing would have outperformed what I accomplished on my own. My primary focus is income growth but I do track my total returns as well. My portfolio CAGR from June 30 2008 to Dec 31 2015 is 9.19%. Your typical indexed, couch potato, currency hedged, iShare portfolio of 20% XIC, 20% XSP, 20% XIN & 40% XBB returned a CAGR of 4.23% over the same period. My portfolio even outperformed Warren Buffet’s BRK.B by 2.33% annually. We’ll see how I do going forward but as I said, I’m in this for the growing income which is averaging 8.39% growth annually and accelerating with reinvestments. My income increased 13% in 2015 without adding in any new money. My holdings are built for retirement income and inflation.

          4. “…I’m in this for the growing income which is averaging 8.39% growth annually and accelerating with reinvestments.”

            Wow, great work: “My income increased 13% in 2015 without adding in any new money. My holdings are built for retirement income and inflation.”

            Exactly what I aspire to doing, letting my investments do the work so I don’t have to!

          5. cannew,

            Excellent points but I do incur a monthly commission as I selectively reinvest my monthly dividends into the stock of my choice. I’ve never dripped.

          6. @Grant: I doubt investing in an index fund would return me even what I am getting just from our dividends. My dividends are currently returning 6% (on my Adjusted cost Base) and rising, before even considering total return. How much more do I need to beat the market, 3%? 4%? What type of return are Index funds providing? I’m not talking Market return because that’s a year to year comparison, but return on investment? The disbursements from Index funds rarely rise consistently, rather they go up & down and may even include a Return of Capital, giving me back my own money and calling it a disbursement (M James calls it fractions of pennies, but it’s still not income).

    3. I think you deserve 6 Stars Bernie. I’m retired (in my 70th year; 10th year of retirement) and have 1/3 Canadian stocks, 1/3 US stocks and 1/3 Ishares monthly income fund and 2 bond funds. We don’t have a pension so the monthly income fund gives us a “sort of pension”. I hate paying fees but that’s life. We cash in a little stock each year for travel. As you probably know the older we get the more expensive and more difficult physically it gets. (better do it while we can.) Our CPP and OAS more than cover our fixed expenses and our kids have great jobs so they aren’t in need of an inheritance. I’m with you; the less the fees the better. Congratulations; you have done well!

      1. I don’t think you owning a monthly income fund is a bad thing, you need and want the cash flow, that product is designed for that.

        If CPP and OAS more than cover your fixed expenses – you’re in a very good place 🙂

      2. Definitely add you to the All Star list. Always good to hear from those of us who don’t have company pensions and still managed to generate an investment to support their needs.

      1. @Gary: Actually it’s two Cdn stocks I want to get rid of. One cut its dividend during financial crisis and the other has slow dividend growth. But I’ll hold till the market improves, or just hold and hopefully they’ll begin raising the div significantly.

          1. @Gary: Notice I didn’t sell the cut from 2009, I just hold and might sell if the prices rises. It’s still generating 2.5% but it’s a minor stock in my holdings. Patience, patience, patience. At our age wheat’s the rush, especially since the rest of the holdings continue to increase their dividends.
            I like the full reinvestment of dividends and with close to 60k being reinvested they compound quickly, especially with no fees and the current market dip.

          2. “At our age wheat’s the rush, especially since the rest of the holdings continue to increase their dividends.”

            Heck, at my age, I don’t buy green bananas 😛

  14. Cannew, interesting comment, and illustrates how important it is to go with a strategy that you are comfortable with. When you started investing there were no ETFs and the mass of research around this area had not been done, so the very good and popular strategy of DGI was likely the best way to go, and you have been very successful at it. If ETFs had been around and you had invested using a passive indexing approach, almost certainly you would have bigger pile now (unless you really are Warren Buffet), but you clearly have enough, in fact way more than enough as you are reinvesting dividends and not selling shares, so it really doesn’t matter. However, for young people starting off, particuarly those who maybe cutting it a bit fine in terms of having enough, I’d encourage them to go the total return route with low cost index funds/ETFs as that has now been shown to be the most efficient way to invest and therefore increase the odds of success.

    1. Excellent point Grant about the mental comfort or confidence when it comes to investing – that is very important.

      I also believe for young people starting off, likely focus on total return. They can certainly expand and hold individually securities later on if they wish, using a DGI or related approach. There is absolutely nothing wrong with earning market returns long term.

  15. Like many my age we look to save pennies with the thought we’ll then automatically save dollars. The other thing I dislike about ETF’s, as others have stated, is that their top 10 represent probably 80% of the portfolio. So the remaining 20% (and some of the 10%) are there in hopes of performance, yield, or just included to match the index. When I looked at several of the etf’s Mark listed the smallest had 70 stocks while the largest had 7500. Even in the 70 I would not want to buy at least 70% of them, so why would I want to buy the bundle? I wouldn’t know where to start evaluating the 7500 bundle.
    If one was looking for a nice bundle, just go with Marks 16: “top-5 CDN banks, top-3 utilities in FTS, EMA and CU, our telcos like BCE, RCI.B, and Telus; in addition to energy and pipelines like ENB and TRP.” Then add some quality US in an RRSP or even a REIT in TFSA. Buy just those, keep adding when prices drop and I’d bet you’ll retire happy on the Income they will produce. Ignore worrying or comparing if your performance matches or beats markets or index’s.

    1. Cannew, one of the fundamental points about passive indexing is you don’t have to evaluate any of the stocks, whether there are 70 or 7500. You just buy the market, because the evidence shows that that strategy will outperform the vast majority of investors. It really is as simple as that!!

      1. @Grant: Someone wrote something like: Large investment firms, Mutuals, and such can’t beat or match the market because they Are the market and because of their fees” So maybe one can follow the market but I doubt one will beat the market. I’m not sure how one evaluates “Outperforming the vast majority of investors”, other than using the cliche “most investors loose money”.
        I don’t suggest that over time sticking with an ETF strategy will not do well or that it’s a bad strategy. Many who stuck with Mutuals did well, even with the high fees. It’s just not for me.

      2. @Grant: I lost faith in Advisors and Fund Managers long ago. Even with Index’s they are still turning the stocks over and making decisions on which stocks to buy and how much of each. I selected my stocks over the years and narrowed it down to a select few. I haven’t evaluated new stocks for years, I just monitor the dividend and it’s safety. As long as they don’t cut or discontinue the dividend (have only had two cuts in 10 years) while the rest continued to raise and/or hold during the financial crisis. By reinvesting my dividends my yield rose considerably during the bad times as did my portfolio value. The price changes have no effect on my portfolio or my evaluation process. I just keep recording the dividends received, re-invested, and increases. It’s really that simple!

        1. Cannew, cap weighted indexes, which are commonly used in passive indexing, are put together by cap weights. The managers are not making decisions about which stocks to buy and how much of each. That would be active management.

          1. Not that I understand, but here’s an excerpt that sounds like a cost to rebalance.
            “Both market cap weighted and equal-weight indexes of the same sponsors, tend to change components at the same time. The difference is that the equal-weight indexes must be rebalanced back to the target weightings periodically, while the market cap weighted indexes are not rebalanced to correct for market price changes. Rebalancing generates a few basis points per year of cost drag in ETFs, that track equal-weight indexes.”

  16. “Sell lots of them, cheap enough, and you’ll be laughing all the way to the bank”. Might have been said by Ford or McDonalds and what ETF’s are trying/are doing. And everyone believes they are getting a great deal.

  17. Cannew, that’s quite true if you buy the market you can’t outperform the market – you will get market returns less fees, which with ETFs are now very low. But the aim is not to outperform the market, the aim is to get the best investing results you can. And the point is that market returns are much better than what most investors get, because most investors make mistakes that leads to them to getting below market returns. That’s why indexing outperforms the vast majority of investors.

    1. @Grant: Using the Rule of 72 and just using a 6% compound growth rate, that should mean my dividends will be returning 12% in 12 years. Even at 4% I should be close to 10% in 12 years.

    2. @Grant: “That’s why indexing outperforms the vast majority of investors.” If that’s your objective go for it. For the last 12 years my objective has been to generate income from my investments (real dollars, not paper percentages) and have that income grow consistently. I found that restricting my stock choices to companies that have a long history of paying & increasing their dividend and avoiding cyclicals I’ve managed to achieve my goals. I also found I don’t need 100, 50 or even 20 stocks or to carry any International or emerging markets to get the results. Again that’s just me and I am not suggesting my choices to anyone else, its to show that one can achieve real returns without owing the world.

  18. I thought I’d share this one. Indexers frequently quote stats which extol the virtues of passive investing over active management. Did you know 93% of Canadian Small Cap equity fund managers outperform their benchmark after fees? Apparently so according to: “Morningstar Manager Research Paper, “Have Active Canadian Equity Fund Managers Earned Their Keep?” by Christopher Davis and Michael Keaveney, May 7, 2015″ per article “A Defence of Active Investing” published in MoneySense Magazine – Summer 2015.

    For the record, I am not suggesting anyone purchase a small cap fund. They due come with higher risk than purchasing the broad market. Due diligence is a must!

    1. Bernie, thatis a very interesting study and no doubt will receive further attention. The study period is fairly short at only 10 years – it will be interesting to see if the ourperformance persists over the next 10 years as well. Certainly that has not been the case in other markets.

    2. 93% of mutual fund managers will change their benchmark to whatever makes them look good, regardless of their actual performance 🙂 Ok that number may be a little off but it’s about as accurate as your typical mutual fund marketing.

      1. Richard,

        I wouldn’t single out mutual fund managers, passive index investors and index fund purveyors have also been selective/creative/distortive at times in their comments/articles/literature. we often don’t hear the “whole” story. I try to practice due diligence before venturing into something I don’t understand.

        1. Index funds have a lot more transparency. They can’t call it a Canadian equity fund with a benchmark of large cap companies, invest in small companies, and then say they outperformed when small companies happen to do well. This is common with active mutual funds but very hard to do when your benchmark is identical to your fund. It’s not like my holdings in XIC are about to start buying up US stocks and then claim it beat the index when the Canadian market does badly.

          Mathematically index funds will always return the average of comparable mutual funds plus the bonus from lower fees. If anything other than this happens then either the mutual funds are a tiny piece of that market and someone much bigger is losing a lot of money in it (I have yet to see an important market where this is the case) or the mutual funds are misleading investors.

          1. Richard,

            I wouldn’t call this misleading unless the fund mandate has been compromised. If I were a fund customer I could care less whether a few U.S. companies or small caps were added to a “Canadian Equity Fund”. I place more importance to performance than I do to stay within the lines of classifications. Isn’t this is like saying a film Comedian shouldn’t be allowed to play a dramatic part because he’s a Comedian, not a dramatic actor?

          2. Breaking the rules is all fun and games until you break something! First it’s misleading to investors because the fund manager could claim that they outperformed the wrong benchmark, while their results were really far below the market they were investing in (and in all likelihood an index fund in that market did better than them).

            Second it means I don’t have control of my portfolio and I can’t decide what I want in it. Sure, adding a few US stocks to a Canadian equity fund wouldn’t be a disaster. But if that’s ok what’s to stop an income fund manager switching from bonds to dividend stocks? Retirees depending on that fund might be pretty shocked to see its value drop 30%.

            I would rather have bad performance than misleading funds because bad performance is usually followed by good performance but a small lie is usually followed by a bigger lie. No one on earth can outperform the market every year so the price has to be paid eventually. My investment portfolio is not where I want someone to be taking uncontrolled risks that are not what I expected. “I don’t care what’s happening as long as I make money” is exactly what Bernie Madoff’s investors said…

          3. Richard,

            You are painting the mutual fund industry with a very broad brush. Certainly there are a few bad apples out there, you find them everywhere, but you shouldn’t generalize or assume the untoward actions of a few is the norm for all. You can spout whatever like on here I suppose, it’s a free country. I prefer to look at the evidence with an open mind and evaluate things myself before I comment.

            Yes, mathematically index funds will always return the average of comparable mutual funds plus the bonus from lower fees but only if they have close to identical holdings. In this instance I’d say the lower fees translate to greater performance. The rules within the mutual fund industry have to be more relaxed so managers can, at least, try to outperform. Not everyone wants to look the same as everyone else.

          4. Recall there really isn’t much difference between some indexed mutual funds and indexed ETFs, they are funds after all and the trading platform is different – but there are more similarities than differences.

  19. Bernie, higher total return in retirement is what generates more income. If the yield of the portfolio is insufficient (most likely the case these days), create your own home made dividend by selling some equity in up years and some bonds in down years. It is very straightforward and described in CCP’s article that Rob Engen linked to in his comment above. That way you you don’t have to save so much and have a more diversified and therefore less risky portfolio.

    As you know, comparing different strategies over short periods of time and not risk adjusted does not really mean anything. And currency hedging is not part of CCP portfolios.

    1. Grant,

      CCP’s article makes perfect sense for indexers who’s yields are insufficient to cover income. Hopefully, they’re sophisticated enough to recognize when and what to to sell. I don’t foresee the need to sell anything myself until the minimum RRIF withdrawal rules dictate it. I’ve told my wife to put everything into Mawer funds when that time comes, or I can’t run my show anymore.

      When I compare different strategies I look at several different time frames, not just short ones. You, and/or other investors on here, might be interested in the “Periodic Table of Annual Returns for Canadians” which covers annual returns from 1970 to 2015 in Canadian dollars. Link here: http://www.ndir.com/cgi-bin/PeriodicTableofAnnualReturns.cgi

      1. Bernie, that’s just the point about the total return approach – you do not need to save so much that yields can cover income. You sell some shares (so long as the total take is not more than about 4%). With not having to save so much you can work less or retire sooner. Or work the same and spend more in retirement etc. To focus on cash dividends only for retirment income you have less diversified and therefore riskier portfolio. I think investors who focus mainly on cash dividends, and who will not sell some shares (create a home made dividend), are ignoring an important part of their investment which can be used to fund cash flows in retirment, rather than saving more so they have enough to live off only the cash dividends.

        1. I think the thing is Grant, for the 4% SWR to work as part of total return, you have to assume that total return is at least 4% as well. The sequence of returns will be important to investors following a total return approach. Once cash outflows start occurring, and depending upon the market, it’s not enough for returns to average out in the long run because prolonged, sideways markets could deplete the portfolio before any good returns show up. I firmly believe this is where the market is heading. “Average” returns of the past won’t be average going forward. Just my hunch and if I’m wrong, so be it, I hope to have enough money anyhow.

          1. Mark, I think the research on this (William Bengen) showed that 4% worked for even the worst two starting years. For all the other years there was money left. Of course there is no guarantee going forward, but 4% is regarded as a good starting point. One can always cut back a bit on big down years, just as you would if you salary went down while working. You can also check it against a variable percentage withdrawal spreadsheet, set it to age, say 100 and by definition you will not run out of money until then.


        2. @Grant: “that’s just the point about the total return approach – you do not need to save so much that yields can cover income.”
          TSX Feb 2015
          TSX FEB 2016
          12735, DOWN 15.8% 1 yr

          TSX Feb 2011
          TSX FEB 2016
          12735, DOWN 7.5% 5 yr
          Seems like the only returns for those getting market returns are dividends and their 4% withdrawals will be decreasing, not increasing.

          1. Cannew, this is exactly why you need to be globally diversified. Canadian stocks have had a 5 year return of only 1.68% (total return), while international stocks have a 5 year return of 5.11% and US stocks a 5 year return of 15.43%. So you wouldn’t be taking withdrawals (cash dividends or capital), from Canadian stocks for most of that time. To be mainly in Canadian stocks, which is only 4% of the world market, is to be not adequately diversified and therefore is risky.

      2. This is where I struggle a bit with the total return approach. Do I sell today to lock in some modest gains? Wait until next week? Wait until next week? Maybe I need a 2-year cash wedge vs. 3-year cash wedge? You can take away some guesswork with dividend payments. No?

          1. Grant, there is more certainty and less volatility in investing for dividend growth than investing for capital gain. This is less risk! Take a look at the JNJ graph in the centre of the attached article. The graph compares a 10 year price chart vs a 10 year dividend chart. The comparison would be even more graphic if the time period covered 53 years which is the period of consecutive dividend increases for JNJ.

        1. Mark, the simplest way to think of this is as follows. You have 2 ETFs in your portfolio, say VT for stocks (Vanguard Total World stock ETF) and VAB for bonds in a mix of 50/50. At the beginning of each year (or month if you wish), you collect the dividends, and if not enough for you cash flow needs, sell a slice of whichever ETF has a higher value than the other, ensuring you don’t withdraw more than 4% of the value of the portfolio when you retired, adjusted for inflation. Most of the time you will be selling shares from the stock ETF as 3 out of 4 years the stocks market goes up. This is explained in more detail in this post from the blog “The SimplePath to Wealth”.


          1. So if I understand correctly, I need to hold bonds for the total return approach – is that a must? I see bond yields doing next to nothing over the next 20-30 years, which worries me (although a couple of recent dividend cuts I will write about in the coming weeks aren’t helping me either 🙂

            I could see that: selling the stock ETF more than the bond ETF. I guess I would just worry about the sideways markets for a few years. I would also need a good cash wedge approach. I’ll have to think about it more Grant. Maybe write an article about my thoughts on that as well.

            Here were my thoughts about my long-term plan via cash wedge:

            “So, for less maintenance I will likely do something like the following:

            Treat any income from our pensions like it is: fixed-income. I will try to ensure this fixed-income allocation is about 30-40% of our portfolio. If we cannot meet this criterion I will use whatever portion of our investments to get this fixed-income allocation. It is my expectation that most of our fixed-income will pay for basic retirement expenses (all food, all shelter and all clothing). If not, we will have to a) work longer (to build our portfolio) or b) spend less in retirement or both.
            I intend to keep about one-year worth of retirement living expenses cash savings.
            After the one-year cash fund is tucked away I will create a 50/50 split of the remaining portfolio funds this way:
            -50% invested in dividend-paying stocks from Canada and the U.S. (about 30-40 stocks in total) and use the dividend income generated from these investments for living expenses, and
            -50% invested in a couple of low-cost, diversified, equity ETFs that invest in thousands of stocks from around the world. We will spend the distributions from these investments and keep the capital intact for long-term growth.”

            Basically, our plan is to “live off dividends in early retirement” and start finding ways to draw it down gently.

            I figure $1M invested will do the trick.

          2. Mark,

            “50% invested in a couple of low-cost, diversified, equity ETFs that invest in thousands of stocks from around the world. We will spend the distributions from these investments and keep the capital intact for long-term growth.”

            Are there not withholding taxes on distributions from these type of ETFs as many of their holdings are in less than tax-friendly countries? I got burned a few times on withholding taxes taxes when I briefly owned stocks domiciled in Spain, Ireland and the U.S. (an MLP). Needless to say, I sold immediately after finding this out the hard way. I now only invest in Canada, the U.S. and U.K. to avoid these unwanted taxes.

          3. There are, depending upon what you invest in and what accounts. Meaning, there are withholding taxes on distributions from CDN ETFs that hold US assets. There are not any withholding taxes on U.S. listed ETFs inside your RRSP however. International stocks domiciled in Spain, Ireland, etc. have withholding taxes applied.

            So, to your point, you need to be careful what you own and where (meaning what accounts). Not all accounts are created equal thankfully!

          4. Thanks Mark. I’m well aware, now, of tax implications with stocks and mutual funds in my accounts. It’s the ETFs that I’m not overly familiar with. Many indexers who invest in ETFs, or stock pickers for that matter, may not be aware of those pesky withholding taxes.

    1. Funny that Canada Customs & Revenue feels Adjusted Cost Base must be used to determined if one has a gain or loss if your holdings are sold. If it’s good enough for them I’ll use it as the cost of my investments and base that figure on my dividend yield. Better yet I’ll just stick to actual dividends received and be happy if the amount continues to grow each year (10.94% increase in 2015).

  20. @Grant: Quote: “This would be a very compelling argument in favour of a dividend growth strategy — if only it were true. Unfortunately, it’s just terrible math. Here’s an example of the logic that investors use to arrive at this spurious conclusion:
    In 2000, I bought 1,000 shares in Phil’s Nails for $20 each. The stock’s yield was 4%, or $0.80 per share.
    Over the next ten years, Phil’s Nails increased its dividend by 5% every year, so by 2010 it had grown to $1.30 per share.
    Since my original cost was $20 and I’m now receiving $1.30 per share in dividends, my yield on cost is 6.5% ($1.30 / $20).
    Therefore, I earned 6.5% in 2010 on dividends alone.
    The first three statements here are fine, but everything falls apart in the last point. The investor here has assumed that his yield on cost and his annual return are the same. They’re not.”
    Is the 6.5%, YOC or Annual return what’s really important? I think it’s whether going from $800 per year to $1,300 per year over the 10 period is sufficient. Does the income growth meet his\her needs or could another investment have generated more income. Again if he\she sells the 1000 shares his ACB is still $20,000 or $20 per share.

    1. Cannew, if you buy $10,000 worth of stock A with a 4% yield ($400), then 10 years later the stock is worth, say, $20000 and the dividend is now, say, $800. If your wife got into your brokerage account and sold all the stock, what would you do? Presumably you would buy it back (seeing you didn’t intend to sell it in the first place), then what is your yield? 4% of course. Yield on cost is an historical feel good relic that doesn’t mean anything. It ignores compoundingover the years. It’s the current yield that matters, not YOC.

      I think what happens is that if investors focus so much on the dividend, they forget about the capital gains of their investment. It is the total return of the investment that matters, not the yield alone. In retirement, if the yield is not enought to support cash flow need, then sell a few shares for a home made dividend. It makes no difference if you take money from your investment as a cash dividend or a home made dividend. If you only take cash dividends, you will need to save a lot more money to support your retirment, or focus on just high yield stocks (or bonds) which gives you a less diversified and higher risk portfolio

      1. FWIW, total return matters and dividends from many blue-chip companies are a big part of that. Yield is beneficial for sure, but effectively, you could sell shares of TD Bank, that paid no dividends and get the same return on investment if TD Bank pays dividends (which is does). There is some help with dividends in that you don’t have to guess when to sell to crystalize a capital gain. A total return approach takes a bit more timing and re-balancing.

  21. I tend to side with Grant with regards to YOC. It’s more a “feel good” metric to track performance but, seriously, I don’t know of anyone who refers to YOC as their actual current yield (current annual dividend/current price per share). Personally, I’ve never tracked YOC. I much prefer DGR, TR or capital gains (for the Feds @ tax time).

    1. @Bernie: I have recorded every purchase, sale, split, merger, dividends received and reinvestment in order to maintain my Adjusted Cost Base for every holding and the total. It’s what I call YOC. Usually once a quarter or yearly I record market value but do not really care if I’m up or down from the previous period. It’s more to see the difference from my YOC, which I have a nice cushion. As I rarely sell Cap Gains is not an issue, just my dividend T5’s and how to split them to minimize taxes if at all.
      As mentioned, its the income and its growth I also care about and track them carefully. That’s my measure of success or not.

      1. cannew,

        Most define yield on cost (YOC) as the current annual income/average price of the security. I personally don’t place much importance in YOC and rarely track it. To me, the current yield is the important one which pays the bills. I agree the most important feature of a DGI portfolio is the income and its growth. I keep the same records as you for my non-registered account for tax purposes but not for my RRSP which holds the vast majority of my dividend growth stocks.

          1. Sorry Mark, I disagree. Current yield is important when you want to add to your position, it’s your current income that pays the bills (unless you mean yield on your invested dollars).
            Regardless of the current value of the money you’ve invested, whether it’s $10,000 or $1mil, that’s amount you invested. It only changes if you sell and the selling price changes daily. So I prefer to use the constant figure, my cost.

  22. @Grant: “If you only take cash dividends, you will need to save a lot more money to support your retirment, or focus on just high yield stocks (or bonds) which gives you a less diversified and higher risk portfolio”

    I’ve read and heard this from many sources. At age 55, we had our financial forecast prepared by two Banks and they both predicted we would run out of our investments between the ages of 70 to 90, depending upon our living expenses, Unless we started contributing Much, Much more money.

    That’s when I realized my investment strategy (trying to increase the pile) was not working and gradually found and actively switched to concentrating on how much income my savings would generate. We made mistakes, chased yield, still sold a few, etc., but eventually settled on Connolly’s strategy and stuck with it.

    Here’s how it worked for me: Every time I bought I received 3% to 5% yield. I reinvested the dividends and tried to add when I got higher than the stocks average yield. I was lucky to be able to buy during 2007/2009 where yields really jumped, and continued the process. Over time my yield on investment grew and suddenly I had $1mil of my money generating $60K. Current yield on the stocks I owned were still 3% to 5% but my average was 6%.

    Oh and no I don’t have any high yield stocks (one reit) or bonds, but I do have a less diversified portfolio. Just sticking to the Slow & Steady stocks.

    1. Cannew, I’d wonder if perhaps the Banks had an ulterior motive in predicting you’d be sleeping under a bridge – something like give us your money to invest so maybe we can help you?

      1. @Grant: Probably, but at least by owing their shares, one gets back a reasonable return. I’d hate to have only pay their fees and leave my money sitting in their vaults with no return.

  23. Mark, no you don’t have to own bonds for the total return approach, but they help smooth the ride, when stock crash they tend to go up, so help people stay the course and not panic sell in a crash. They are there not so much for return (especially these days) but to help people avoid the “big mistake” of panic selling. Cash can serve a similar purpose, but does not go up in a crash. If you don’t own some bonds, you’d need to have 3-5 years of cash to rely on during a big bear market. One good point about DGI is because of the focus on dividends and away from price, for some investors it’s easier to ignore the price drop in a crash and avoid panic selling. Of course, dividends can go down in a long bear market, too

    I like your plan. It is essentially a mix of 30-40% bonds and 70-60% stocks, with the stocks a 50/50 mix of a globally diversified ETF mix, and some dividend paying stocks. As the saying goes “There are many roads to Dublin”.

      1. cannew,

        “Did bonds go up during the 2007\2009 crisis and have they since then?”

        U.S. long bonds have done well since the crash. Or at least whenever U.S. equities faltered as they have a direct inverse relationship to them. I can’t see buying any bonds for my portfolio. If I activated all my income steams today fixed income content (from company pension, CPP & OAS) would add up to about 58% of the pre-tax cash flow. I’m not including my wife’s income. She’s still working full time.

      2. Cannew, yes, they behaved as expected. In 2008 sovereign bonds went up 8.7%, (XGB). The commonly used total bond fund ETF, XBB went up 6.2% due do having about 30% corporate bonds, which usually stay flat or fall slightly in a crash. XBB has been up every year since, except 2013 (-1.4%) and was up 9.4% in 2011

    1. “@Bernie, Cannew, Grant and Mark: I feel like I’m back at school reading all your posts — will there be a test? (:”

      Be careful about how you word your question Gary. I believe Grant is a medical doctor.

  24. @Gary: I wish they had taught or at least discussed the various choices in school! Your grade will depend on how happy you are with your strategy and the results.

    1. “I wish they had taught or at least discussed the various choices in school!”

      Heck, they seldom even teach the bare basics like balancing a chequebook or constructing a budget in our schools.

  25. @Bernie: They did teach Compounding, but I wasn’t smart enough to realize it was something I could ever use, or apply to real life situations.
    Grant a doctor, probably think I’m hyper!

  26. I know this is an old post but something I have been thinking about lately is whether TSX index investing qualifies for this discussion. All of the studies and discussions I have read are about the US stock market, not the Canadian. In the TSX index, 33% of the holdings are in energy and materials, compared to 9% of the S&P index. That’s a big difference to be put into cyclical sectors.

    Call me unconvinced that full TSX index investing is something that you want to do. You can probably have a good approximation of the TSX without these sectors by carrying 10-15 stocks or even 2 or 3 sector specific ETFs like XFN, XRE, ZUT, etc

    1. Matt C,

      Very good point. I’m not into ETFs but I consider “iShares S&P/TSX Canadian Dividend Aristocrats Index ETF (CDZ) as the most diversified Canadian offering. It covers the sectors much better than the others. It has also outperformed the Canadian index long term.

      1. CDZ seems to be an improvement but still holding 25% energy and materials. It also has a 0.66% MER – ouch! If you bought the 5 major banks over that same term it would have beat both of them. Something to think about.

        1. MattC,

          As I said I’m not an ETF guy, or look at MERs. I look at performance. If I was choosing a fund it would be from the Mawer offerings. First and foremost, I’m a stock dividend growth investor. Mawer Balanced Fund is the survivor inheritance suggestion for my wife.

          1. Mawer has had a great history, no doubt. As long as you are getting great performance, nothing wrong with modest MER.

            Good plan Bernie for your wife, that’s smart.

        2. I personally like to hold CDN banks, telcos, utilities, etc. directly and avoid any MER whatsoever. The way I see it, if all major CDN banks, telcos, etc. go under, the country is going under. It’s that that hard to select blue-chip stocks that should continue to perform over time in Canada. The operative word is of course, “should”. There are never any guarantees!

          Thanks for the comment Matt.

    2. “Call me unconvinced that full TSX index investing is something that you want to do. You can probably have a good approximation of the TSX without these sectors by carrying 10-15 stocks or even 2 or 3 sector specific ETFs like XFN, XRE, ZUT, etc”

      Agreed….if this is what you mean Matt – I can count on my fingers and toes the number of stocks that you would need as a proxy in Canada, Canada only, for the equity market. Sure, owning the other 220 stocks in the index might be good, upside, but you also get the duds. You can’t compare the Canadian equity market to the U.S. It’s an apples and oranges conversation… Just my take.

  27. I don’t think that because the Canadian market is less diversified than the US market changes anything. The alternative is to pick stocks or sectors which gives you an even less diversified, and therefore higher risk portfolio. I’d just stick with the index.

    1. Actually, I’m concerned that the TSX index is skewed towards cyclicals, not under diversified.

      The whole reasoning with buying the index and not stock picking is that studies show that it outperforms managed funds. I’m just saying that all this data is based on the US stock market which a very different animal. You just have to look at the returns of the TSX index over the long tern and compare it to the S&P Index.

      An interesting discussion to have, I think.

  28. Bernie, I wouldn’t say that CDZ is the most diversified Canadian offering. It has only 68 holdings whereas XIC has 240 holdings. It’s true CDZ has outperformed XIC over the last 5 years (10 year figures for CDZ are not out yet as it hasn’t been around that long), but as DGI investing is such a popular strategy, especially due to such low interest rates resulting in people reaching for yield, so valuations of dividend stocks have been driven up in the last few years, and therefore expected returns are lower, so CDZ may not do so well going forward.

    1. Grant,

      As you know I consider “diversified” to be covering the sectors not # of holdings and I don’t feel they have to be evenly spread either.

  29. Matt, it’s true that the Canadian and US markets are different and will have different returns over different time periods. But that doesn’t mean that picking stocks is any easier in the Canadian market. Looking at the SPIVA Canada reports shows that the majority of actively managed Canadian equity funds underperform the index.



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