August 2011 Dividend Income Update

Last month, I wrote the following:  the ebbs and flows of the market don’t faze me much.  While economic uncertainty will always be on the horizon, I had to chuckle when I read a recent article on the iShares website.   Overall, a very good article.   What brought smile to my face was the suggestion about the recent (?) popularity of buying dividend-paying stocks.  The iShares article when onto state:

“Do you really want to be in the stock-picking business? I work with very smart people at BlackRock who analyze stocks every day for a living. Doing this well takes a lot of time, resources and training. Even if you make a solid pick at the time of purchase, circumstances change; you can’t just “set and forget” when it comes to individual stocks.”

I agree with part of this statement but I’m not convinced finding, buying and then owning quality stocks is an elusive exercise the smart folks at BlackRock or some other investment firms can do.  You just need to check your emotions at the door and not be forced into chasing profits for senior management.   Sorry BlackRock.  A few posts ago, I told you as much as well.  Sure, monitoring stocks and making portfolio adjustments is a commitment but there’s always some commitment as a DIY investor.  Don’t you think?

What was BlackRock’s alternative to my dividend investing approach?

Well, they said, “If you’re really committed to dividend growth as an investment strategy, why not consider one of the older dividend growth ETFs or newer generation of rules-driven ETFs that focus on offering diversified exposure to dividend-paying stocks in a cost and tax efficient manner?”

Sounds reasonable.

The example they highlight is the iShares High Dividend Yield Fund (HDV).

So friends at BlackRock, I took at look at your HDV and this is what I saw:

• MER = 0.40%
• Total holdings = 76
• Top holdings = AT&T (9+%), Johnson & Johnson (7+%), Procter & Gamble (6+%) to name a few.

“The iShares High Dividend Equity Fund seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the Morningstar Dividend Yield Focus Index.”

OK.

This ETF was just launched this year, so there is very little historical performance data available for it.  However, in looking at the objective of this product and its U.S. holdings, I can’t help but think this product is “a wanna be” dividend investor.   No doubt few
investors could ever afford half, let alone all 76 companies in their portfolio.  I know I never will.  But why not start the process?  Why not own a few of these dividend-payers directly if HDV thinks so highly of them?

My thesis is this – if the “High Dividend Equity Fund” has three companies that comprise over 20% of the funds’ holdings and arguably 20% of the fund performance, why would you want to pay long-term fees to own those three companies when you can own them directly?

I’m not trying to knock ETFs, specifically HDV.  Dividend ETFs in the U.S. and here at home are great products.   HDV seems like a decent product for the price.   I don’t own HDV but I own other ETFs – they provide excellent diversification for a small fee.  You can’t get the type of HDV diversification without some massive capital outlay.  But there is some significant compounding power to be taken advantage of in owning dividend-paying stocks directly.  Buy ‘em, hold ‘em and watch your passive income grow.

There are risks with this dividend investing strategy.   Companies rise, companies fall.   You may not beat the index if that is your goal.  No company is immune to economic forces nor the global winds of change.   Yet I proclaim direct ownership in a diversified set of established, large-cap companies is a great way to invest because you’re now a partner in a real on-going set of businesses.  To me investing is all about that partnership; knowing company prices will routinely rise and fall in the short-term but gains will be seen over time.

As hot tips come and go, media darlings become praised or scolded like RIM (by the way, RIM doesn’t pay a dividend so I would never own it), I’m going to invest in companies that feel just as comfortable as I do this morning, with a warm cup of coffee on my table as I type this post.

I see my ownership in Canadian and U.S. dividend-paying companies like bricks on my house:  carefully arranged, layered, side by side as each quarter passes with a dividend payment that gets reinvested to buy more bricks or different kinds of bricks, maybe some that build an interlocking patio.  Over time, these bricks multiply, right before my eyes, working together to build a beautiful, solid, financial foundation.

Companies like Emera (EMA) and Bank of Montreal (BMO) paid us dividends this month and for each stock we own, we’re getting our bricks for free.  We bought enough of each company over the years so now, each company provides us at least one commission-free share each quarter.   This power of DRIPping doesn’t mean too much now, since I’m many years away from collecting those dividends as income yet in another 20 years that will be a different story.

This past month, I calculated my wife and I are on pace to earn just over $5,000 this year in dividend income from our Canadian dividend-payers alone.   That money is sure to compound over time, since it will be reinvested, so it will continue working for us so we don’t have to someday.

I’m certainly no expert investor.  I’m learning every month and every year as My Own Advisor but our dividend investing approach seems to be working.  It is an outstanding compliment to our indexing approach in our RRSPs.

Using dividend-paying stocks for a portion of our retirement plan feels good, feels warm, just like the coffee still does 🙂

Are you a fan of dividend-paying stocks?

If so, are you leveraging them for your retirement plan?

If not, what are you investing in instead?