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?”
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.”
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?
An excellent post!
First off, congrats on achieving $5,000 a year in dividend income for 2011! That’s an awesome accomplishment and it really puts into perspective the value of incorporating such an investment approach.
ETFs may be able to provide the investor more broad-based, diversification but they don’t offer the potential that dividend-paying stocks provide to investors from a investment income perspective. Like you, at the core of my overall strategy lies one in which investment income is front and center.
Take many of the dividend-style funds that are available to investors. Like HDV, many of them have high MERs and the payout is nowhere near what you would earn by owning many of the top holdings directly, as mentioned by MUM.
As you know I am a fan of low-cost ETFs and have been patiently ramping up my research before making any positions. Your series from last week will likely be the main resource I refer to before making a plunge. 😉
@cashflowmantra: Nice! I’ve been watching INTC throughout the past several weeks, as has many of us. If I’m not mistaken, I believe Dividend Mantra short-listed it as a final candidate before making a recent position, and Dividend Ninja recently did a guest post on another blog showcasing it.
All the best. This blog rocks.
Thanks re: this blog rocks. I enjoy writing the articles and I’m glad folks enjoy reading them!
Yes, that was a great barrier to cross-over. Hopefully our next major barrier, $10 K, is only a few years away. If we keep with our strategy of only buying companies that have a long, established history of paying dividends, I think we’ll get there. The great thing, regardless of the milestones, I can see the magic of compounding right before our eyes – which is very cool. It took a couple of years but I watching it every month and quarter and finally, my money is working for me.
Broad-market ETFs, I think, are excellent for my foreign exposure outside the U.S. This is where I can minimize risk, ride efficient markets. As you say, with the rest of my portfolio, I can focus on building income for retirement to supplement my pension plan. I’m not counting on CPP or OAS for me. If I get it, great. If not, I’ve taken care of myself along the way.
Thanks for your positive comment, and detailed one at that! I’ve be over to check out your latest post soon.
Great stuff. I’ve made my position on mutual funds (and ETFs to a lesser degree) clear many times. You can take any major fund and look at their holdings…look at their cost basis on those holdings and get a pretty good feel for where they are going and maybe take a clue from there.
Good job on the dividend income! I’m getting there slowly but surely. Keep up the great work!
Yeah, one of the best resources for the DIY investor to select stock holdings always has, and probably always will be, mutual funds and ETFs. Take the top holdings of dividend funds or dividend ETFs and buy the companies yourself. Stock selection, done 🙂
I think about this often as well. What is to stop a guy from simply taking the favoured dividend ETFs and mutual funds out there, holding them up side by side, and maybe putting a dividend aristocrat list up too for good measure. At this point just average out the top ten holdings (which I almost guarantee are very similar) and now you have just benefited from the work of several dozen “investment gurus.” Given how diversified many of these companies are, you are not looked into the financial problems of any single industry or region when you invest in them anyway.
Well said. Make the smart investment guys do the work for you, me, us, others 😉
$5000/year in dividend income —> Bravo! That’s pretty damn good, so far so good =)
That is some accomplishment, and you are well on your way to retiring comfortably (and early).
I would love to own some companies directly as well and get the yields, but I’m still an amateur in terms of analyzing securities. -_-
Thanks for the support, we’re getting there! It’s a long journey Peter, building up this portfolio, but I’m starting to see some progress with it.
Take your time with understanding securities, stocks, ETFs, funds, etc. It is not a sprint, it’s a marathon and everyone runs at their own pace. The key is to find yours 😉
MOA great post! and great minds think alike.. I have been writing essentially the same article on Claymore’s new CUD ETF this weekend. It is exactly the same strategy of weighting higher dividend payers. In reality you can do without those 3 higher risk stocks, and pick your own 🙂 I agree!
I really like your analogy of building bricks of dividned paying stocks, to build a solid house. There are certianly great indexed ETFs that are solid bricks as well (you and I invest in those), but when an ETF gets complicated does it really belong in your house? probably not.
btw congratulations on your investments and solid approach, as well as the $5K dividend income per year – Nice! I got warm and fuzzy reading the last sentence. Coffee and dividned stocks in the same sentence just makes me fee real nice inside 🙂
The Dividend Ninja
Yes, they do! CUD was an interesting release so I’m looking forward to your post on it!
Hopefully my wife and I can continue the slow, steady journey towards a highly diversified stock portfolio. At least that’s the plan! 🙂
Great post. Very nice yearly gain of over $5,000 in dividend income! I hope to be there someday. Glad to see you own BMO, as well.
Hey, where have you been? Too busy building your own site? Anyhow, simply glad you stopped by and made the comment. Yes, I do own BMO, one of three banks we own. Lots to like about this guy.
Any good threads on Canadian Money Forum? I haven’t been on that site much lately.
Thanks for checking in and take care!
I am liking dividend stocks more and more. I bought INTC in August and am pleased thus far. I plan on holding it for a while.
Thanks for the comment and stopping by my site! I’ve subscribed to yours and added your site to my blogroll, after seeing your comments on various other blogs. INTC is an interesting play, good divis, and trading closer to 52-wk. low than high. Are you just buying more of INTC or is this a new position?
I’m liking dividend-paying stocks more and more as well, especially if they are going to help me retire earlier!
Thoughts about other U.S. dividend-paying stocks like DUK, BIP? I’ve been watching them for some time now.