Fans of this site know I take a two-pronged approach to investing.
For one I use Exchange Traded Funds (ETFs) for a portion of my portfolio. I use ETFs and likely always will for these reasons:
- I can achieve market performance less miniscule money management fees,
- I can obtain great diversification amongst companies, industries and world markets, for those low-fees,
- I obtain get transparency, I know exactly what I am investing in and how the product (ETF) works, and
- The ETFs I own are easy to use; they are bought and sold on an exchange and trade like stocks.
Passive investing using ETFs takes the guesswork out of stock picking; which companies will excel or conversely might be duds in the future.
My second approach to investing, is investing in many blue-chip dividend paying stocks for income. I think this approach works for me for a few reasons:
- The income received from these companies is real,
- I can count on many of these companies to increase their dividends over time, helping to protect me from inflation,
- The approach, seeing the income and the capital appreciation from these companies, helps me stick to an investing plan I believe in.
This psychological factor is huge. Preet Banerjee likes to say personal financial success is 90% psychology and about 8% math. The missing 2% is a quirky reminder of the insignificance of the math.
Sticking with a plan I believe in is working for me. There are also other benefits of holding dividend paying stocks directly:
- I can control the portfolio turnover, or lack thereof, with a buy-and-hold approach for many companies,
- Dividend-growing companies tend to be solid performers so you get dividends and capital gains,
- Dividends might make you re-consider selling a stock at the wrong time, at the first word of bad news for an example,
- Dividends instill management discipline, you can read Warren Buffett’s 2012 shareholder report here for evidence of that, and
- For non-registered accounts if you’re lucky enough to fill up the TFSA and RRSP already, the tax rate on dividend income is lower than other forms of income.
I chose dividend investing for part of my financial plan because I wanted to count on companies paying more income each year. Dividend stocks provide no guarantees; companies cut dividends, change their Dividend Reinvestment Plans and in some other rare cases, cancel their dividends altogether. No investment is without risk. That said, I feel as long as diversify my stock selections across many companies, many industries and also countries, I think it’s a sensible income-oriented strategy for many investors.
What’s your take on dividend investing? Too much effort? Too much risk for potential market underperformance?
I’m 100% Cdn DivGth stocks, no bonds, no preferred, no Funds or ETF’s. I looked at the Vanguard High Div ETF and the BMO Div ETF. I only hold 21 stocks and 16 of mine were 70% of the Vanguard holdings and 35% of the BMO. Both ETF’s held 70 some stocks, with many paying little in dividends. A lot were also Resource companies, meaning they are cyclical. Why would I want to own 60 stocks which have extremely low yields and are cyclical stocks.
I like the quote from Stephen Jarislowsky, Investment Zoo “However, my rule is to only invest in top-quality, largely non-cyclical growth stocks that have a predictable high rate of earnings and hopefully, dividend growth” and “Clearly for investors, all things being equal, the fewer fees you pay the more your total wealth is maintained”.
Even with 0.64% fees (.034% Mgt and .030% Mer), you will pay to hold those extra stocks and the costs grow as your portfolio grows. I prefer to only invest in stocks I want and pay NO fees (saving $4,500.00 a yr.).
Thanks for the great comments Henry.
I’ve learned all the top equity mutual funds largely hold the same stocks. I decided instead of owning pricy mutual funds that own these stocks, I might as well own them directly. So far, so good.
I think we’re up to 40 stocks, about 30 CDN stocks. Stephen Jarislowsky is brillant and The Investment Zoo is one of my favourite investing books. Saving $4,500 per year is some very good savings 🙂
Totally agree. As we are retired our list of stocks is really streamlined. We hold just those which have paid and grown their dividends over the years (not necessarily every year). Many would question our allocation as we are heavy banks and financials, but as we’ve had them for many years a market crash will may drop the market value, but our income should hold as it has in the past.
Enjoy our articles!
Some of my stocks haven’t raised dividends in a couple of years, which is annoying, but since they are blue-chip stocks I won’t sell them unless they cut their dividend.
I have some ETF products that I use for capital appreciation, and I don’t intend to sell them either.
Some might question my allocation as well but the banks, the pipelines, the telcos, the energy companies and the utilities are working for us. I figure if my dividend income keeps going up, well over the rate of inflation, I’m saving enough and doing some things right.
All the best Henry.
If you take a skim through my site, you’ll see I always have some financial mess or other to straighten out. : ) I like to document what I’ve done so that I can remember for the next time. I also find it fascinating how three companies offering essentially the same thing (InvestorLine; Investor’s Edge; RBC Direct Investing) can make it so different to do the same thing.
I read here regularly but I don’t always have anything to add as you tend to capture an idea clearly–which is, of course, a good thing!
I tend to look at dividend payers largely from an income-stream point of view. That’s how I landed on KBL, although I wouldn’t buy it right now at its reduced yield. But I sometimes miss great opportunities that way. For e.g. we only got a small position in CNR a few years ago. Talk about wishing I’d risked more! At the time, though, it was also at an “all time high” and I didn’t believe it could go any higher. Wrong. Even Lac Megantic which is so horrific that I still can’t fully comprehend it, didn’t knock CN down. (I know it’s not the same company but I’m very surprised the market didn’t react more.)
To be honest, though, if I could get 5% or higher on GICS/CSBS and if inflation was only 2-3%, I’d probably pull back out of the market. There’s a lot of “me’s” out there, too, which may make for an interesting stock market if interest rates go up on fixed income.
Anyhow, keep up the good work! Even us silent ones are out here reading!!
Great the silent ones are reading!
Same goes with your site…I stop by now and then because I enjoy reading about the financial mess you’ve learned from. I enjoy writing those posts as well.
Yeah, brokerages are not created equal and it makes no sense really…
No, I won’t buy KBL because of the run-up…just kicking myself I didn’t take more risks earlier on. Oh well, I can’t win ’em all Bet Crooks.
Thanks for the kind words, I enjoy running the site and interacting with other investors like yourself.
I think you’re right that many investors are taking a double-approach. For one thing, most DC pensions require you to index invest, so even if a person preferred buying and holding blue chips that might not be an option for a large amount of their savings.
I’m ultra conservative, so I used to be index invested for DC pension and GICs/CSBs for RRSPs. When I did start to invest in the markets, it was only in ultra-conservative Cdn blue chips paying good dividends. Since then, I added a few very small Cdn companies (like KBL) that paid excellent dividends. (When I bought KBL it was over 5% yield–the price of the stock has gone up over 70% since then so the yield is down now.) I still prefer hand-picked dividend payers to indices. It’s like preferring to drive yourself to having someone else drive: not necessarily logical but it feels more comfortable. I also still assume that anything we have in stocks could go to 0 at any time, so we have a big big chunk in fixed income.
Nice to hear from you Bet Crooks, been a while. I read your comments on Michael’s blog often and enjoy the insight. How is your site coming along?
My wife’s DC pension allows some indexed products, but not very many. I’m not a fan of it. Then again, if you can’t beat them, then join them, as in own shares in the pension plan company and we do 🙂
I’m all about ultra-conservative Cdn blue chips paying good dividends as you know. I probably need to diversify more into smaller caps but that takes more guesswork and luck to be correct. KBL has been on a tear over the last 5 years. I had a tip to invest in that about 4 years ago. I did not, largely because I had no money. Now look at that stock?! *sigh*.
Your analogy about preferring to drive is a good one, when it comes to dividend investing. It just feels more comfortable but I will always keep some money in the equity indexes. It’s a safe way to invest if you know what I mean, no guesswork.
Could you please remind me what the overall allocation mix is for your portfolio (fixed/equity/cash)?
One unmentioned gotcha of dividends, that you will not run into for quite a while, is a retiree’s conundrum. Since I seem to recall that you have a defined benefit pension plan it will affect you.
When you retire with a defined benefit plan (and usually a good pension), you will likely not have much or any taxable income headroom before you hit the OAS claw-back threshold. Your dividends from a long established portfolio will push you into that zone and maybe out the other side. From experience….ouch and very frustrating.
There are strategies in this situation but none are perfect. In essence, you are punished for having been a diligent saver/investor… Some will argue that is reasonable but that is another debate all together.
Nonetheless, both the problem and the result are real and must be considered in building your retirement portfolio.
You ask, I will try and answer MrMoxy!
100% equities now.
I used to hold some bonds, bond ETFs, but I don’t invest in bonds or bond ETFs anymore. I only do this because I’m fortunate to have a pension plan at work so I consider that a “big bond”.
This means I’m taking on more equity risk, but I’m comfortable with that. Others might not be in the same situation, i.e., they don’t have a company pension plan so I can appreciate they need and should likely have some bonds in their portfolio depending upon their risk tolerance and investing timeline.
Well aware of that “dividend gotcha” 🙂
I recall the OAS clawback is/was around $70k for 2013. I will more than likely retire with less income than that per year so that shouldn’t be an issue, as OAS clawback thresholds rise over time.
I suppose if I have a tax headache in retirement, that’s a good problem to have. It means my wife and I saved enough money during our working years. It would really suck to be punished for being a saver and the OAS debate is one I enjoy if that’s what you mean. Seniors making more than say $70-$80k shouldn’t get any OAS but that’s a hot button topic.
Any strategies to optimize taxes in retirement MrMoxy? Do share…potentially I’ll write a post about those at some point.
Thanks for the detailed comment.
Hi Mark, most of my investing is happening within my RRSP and TFSA and I’m looking to get more into hands-on investing, specifically dividend investing. Are you investing through certain websites like iTrade or eTrade? I am a big fan of dividend investing and want to go at it on my own, but not sure what the best way to get started is. Any advice?
Great to hear from you Paul. I’m not looking at any bank-related sites actually, for my investing purposes although I suspect for folks just starting out, they might be looking for resources. Well, other than this site of course 😉
In the coming weeks and over the summer, I’ll give some consideration to how an investor could get started with dividend investing and what to consider for that process. I hope you stay tuned for that! Thanks for sharing your ideas and needs as an investor.
Thanks Mark I will stay tuned for those posts. Have a good one!
Most of my investing is dividend investing, for many of the same reasons as you. Unlike you, I don’t own individual stocks; I just am not comfortable enough with investing yet to where I think I could be successful with them.
There are no right or wrong answers Daisy. Investing is like golf, lots of psychology involved and all investors need to comfortable with their plan; otherwise, they are doomed to make a number of mistakes. Potentially big ones.
Hi Mark, I had the impression that your ETF’s are also dividend based for the most part. Or are your ETF’s focused on indexing?
I used to own dividend ETFs when I had fewer individual dividend paying stocks. Now that I own a mix of Canadian banks, telco, utility and energy companies, to name a few, I figured I’d drop all dividend ETFs. This approach doesn’t work for everyone but it’s working for me and it took me many years to be comfortable owning individual stocks.
My ETFs are focused on indexing yes whereby I couldn’t possibly own all the stocks on those indexes, ever, to come close to matching the rock-bottom fees they charge.
I think dividend and index investors need to bury the hatchet and realize that we’re on the same team in the big picture. If a person is invested in most of Canada’s best dividend-payers they’re likely going to come pretty close to replicating the index anyway. If the dividend strategy keeps motivating you to stay the course than I’d echo Preet (a guy always sounds smart when he does this) and say do what works!
Well said Kyle. You’d be hard-pressed to say if someone owned the majority of holdings in ETF XIU, in the same proportions, and simply bought and held those stocks, that they wouldn’t come close to matching that index’s returns year-after-year. The problem is the cost to purchase that index (talking a few hundred thousand dollars + rebalancing costs) but in theory the said investor would be close to matching the index.
The best financial plan is one that allows you to save often, save more over time and plan you can stick to. Yes, that Preet guy is rather smart. 😉
@Kyle – I think Mark is helping to bridge that gap by straddling the fence between indexing and dividend investing. Mark, you’re bringing us all together!
You’re right that we are on the same team and the real enemy is high-MER mutual funds as well as those sneaky, portfolio-churning advisors.
I’ll continue to track my portfolio and make sure that whatever effort I put into my dividend approach is rewarded with better returns. If not, I’d be happy to switch to team passive.
You make me laugh Robb…
I’m with you 110% – the real enemy is pricy funds associated with underperforming products. Kinda like an expensive, long-term contract for a goon that has little place in the NHL.
I track my portfolio but not religiously because I can’t help but think decades of dividend increases from Canadian banks and many energy companies is a BIG company sign that says “I’m healthy and profitable”. Where the sign on the road isn’t clear for many companies, I index because it works.
The reason why dividend investing works for me is because it keeps me from doing something dumb like selling off on market lows. I know that no matter what happens I will likely continue to receive dividend income and that keeps me invested for the long term. If I invested in stocks that didn’t pay dividends I don’t think I’d be able to handle the ups and downs as well. It’s basic psychology but it just “works”
That’s one of the biggest psychological factors for me; the confidence I will likely receive dividend income regardless what the market does. This of course doesn’t mean it will happen but the likelihood is definitely there.
Blah! “Appeal to Buffett authority” when it’s well known that he supports an equity/bond index fund split (a la Bogle) for the average small investor and not blue chip dividend strategy. Makes the point disingenuous.
Fair point Edward… So you’re a fan of indexing?
Also, I’d be curious to know your “for the average small investor” – what portfolio value would you consider that? Again, just curious.
i use eft’s for the bond portion of my portfolio and blue chip stocks for the stock portion. i need income and so far this strategy is working well.
Sounds like a solid approach Gary. I used to use bond ETFs, I’ve written a few articles about those purchases but in recent years I’ve sold all bond ETFs in favour of buying more equity ETFs and Canadian dividend paying stocks. I think going forward, when prices come down that is, I hope to buy more VTI ETF for the RRSP.
I could see a bond ETF + Canadian dividend paying stock strategy working out well for income.
at our age (retired) we need a little more safety in case we need funds in a hurry. if i was 15 years younger i would be following a strategy such as yours.
Funny enough but if I needed safety I might consider following your strategy 🙂
Given I/we have about 15 years or so before our target retirement date, this is why I’m focused on loading up on stocks now (or have been) since 2008. Over time, I will likely increase my ETF holdings to hedge any individual stock selection risk. It seems like a good plan but as always time will tell.
Thanks for the comments as always.
I use a similar two-pronged approach in order to generate income (by investing in dividend growth stocks) and index ETFs (to take advantage of broad market moves).
What portion of your portfolio do you invest in ETFs and dividend stocks?
Have a great rest of the weekend
I wonder how many other investors use the same approach: ETFs + dividend stocks. I would suspect many DIY investors do this. I would think there are few pure indexers (ETFs, or index funds) and even less dividend stock investors only.
I think ETFs compromise about 25% of our portfolios now. I hope to increase this over time eventually to about 50% but I don’t want to sell any existing stocks to do so.