How I built my dividend portfolio

How I built my dividend portfolio

For years, many years in fact, subscribers have asked about my step-by-step approach to building (and maintaining) my dividend income portfolio. Well, today’s post is an update on that approach including how I built my dividend portfolio. 

I am a hybrid investor!

Hybrid investing – what is that?

Long-time subscribers of this site will know I take a “hybrid approach” to investing:

• Approach #1 – we own a number of Canadian dividend paying stocks for income and growth. At last check, we own almost 30 different Canadian stocks across our portfolio. I tend to own these Canadian stocks in our non-registered account(s) and across our Tax Free Savings Accounts (TFSAs) for the most part. We own these stocks because we believe buying and holding our DIY bundle of Canadian dividend-paying stocks will, over time, provide some steady monthly income for future wants and needs in retirement.
• Approach #2 – we’re owning more units of low-cost Exchange Traded Funds (ETFs) over time. While dividend paying stocks are great, including some in Canada, we believe in passive investing. We also believe in investing abroad beyond Canada’s borders. In doing so, we’ll add growth and diversification to our portfolio. While we own some Canadian stocks and some U.S. stocks inside our RRSPs, (names like Procter & Gamble (PG), and Johnson & Johnson (JNJ) to name a few) we’re buying more ETF units with time. 

As I get closer to considering semi-retirement, I will update this post, including my asset mix. 

You can read more why in this lessons learned in diversification post here. 

Lessons learned in diversification – reducing my Canadian home bias

So, with “hybrid investing” as our approach, we invest using a few key accounts at the time of this post:

1. We have self-directed TFSAs – we strive to max out contributions to those accounts every January 1.
2. We have self-directed RRSPs – we strive to max out contributions to those accounts as well, every year.
3. I also have a taxable account. I contribute to that taxable account after TFSAs and RRSPs are maxed, usually in that order. 

We also have small workplace pensions to rely on, as we get older. 

Check out our bucket approach to generating retirement income.

Our bucket approach to earning income in retirement

Why dividend investing?

Not everyone loves dividends like I do but that’s OK. Personal finance is personal.  

There are many reasons why I love dividend investing, as part of total investing return.

Here are just a few of them:

• Dividends are easy to understand. I invest, I stay invested, and I get paid for doing so. Pretty simple.  It’s tangible money I see coming into my account every month from my Canadian stocks and U.S. stocks. It’s money that grows over time thanks to reinvested dividends and new dividend increases. It’s real money we can use (eventually) to pay for any expenses we need.

Check out the multi-year income growth at the time of this post in 2021:

• Dividends can help fight inflation. As consumer prices rise, as the cost of living rises, the companies that deliver our products and services rise along with them. Many of companies I own have a habit of increasing their dividends over time given they are making more cash every year. Some companies are making so much cash they can afford to raise their dividend every year. Those are the companies I try and invest in: dividend growth companies. 
• Canadian dividend paying stocks are tax-efficient. I tend to keep Canadian dividend paying stocks in my TFSA and inside my non-registered account. In a taxable account Canadian dividend paying stocks are eligible for a dividend tax credit from our government. This means taxation on dividends are favourable, it is a lower form of tax; lower than employment income and interest income.

Learn about the Canadian Dividend Tax Credit 101 here

Why index investing?

As much as I love dividends I know the financial future is always cloudy. 

Dividends while expected are never guaranteed. 

Nobody can predict the financial future with any accuracy. Besides, dividends are just part of an investor’s total return. This is why for extra investing security and in hopes of long-term capital gains I index invest the rest of my portfolio outside of Canada.

There are a few reasons why indexing is a great way to invest, these key ones are important to me:

• With indexing I don’t have to worry about any dividend stock selection. Via indexing I can own hundreds or thousands of stocks from around the world for a few bucks per month in fees. That brings me to point #2.
• Owning thousands of stocks via low-cost ETFs can cost less than $100 per year for every $100,000 invested.  That’s peanuts.
• Transparency rules. With a few clicks of a mouse, I can look up the holdings, cost structure, distribution information, tax information and long-term performance of my ETFs.
• I ride market returns. Yup. Passive investing is a winner for long-term growth. History proves that!

Why the slight bias to dividend paying stocks?

Dividend investing, if executed well, has the potential to deliver meaningful, growing income. 

This approach helps me stay the investing course when the market tanks or corrects.

Here’s how I’ve gone about building my dividend portfolio step-by-step and how you can too…

Step #1 – Consider using dividend metrics

Passive dividend income is great but rising dividend income over time is even better. This means I don’t just blindly buy companies that pay dividends. I use a few metrics to screen for my portfolio holdings.  

Here are some popular ones:

1. Consider dividend growth and dividend history. I like companies that tend to grow their dividends every year. I also like companies that have paid dividends for decades or generations.

What stocks have paid dividends for generations?

You can also start your screen from Canadian and U.S. dividend champions or aristocrats.

iShares CDZ is a Canadian Dividend Aristocrats Index ETF. It holds Canadian companies that have increased their ordinary cash dividend every year for the last five years.

Typically, U.S. dividend aristocrats have increased their payouts to shareholders for the last 25 consecutive years. I recall at the time of this post there were about 51 or 52 such U.S. companies in that list – which is updated every year. You can check out the U.S. ETF NOBL for the current list. 

2. Consider dividend payout ratio. I like companies that aren’t sacrificing all their cash to reward shareholders. I mean, share buybacks are good for shareholders too! Therefore, companies that have a modest payout ratio are companies I tend to focus on.
3. Consider rising cash flow. I have an affinity to companies that grow their earnings and cash more over time. So, look for higher EPS and rising cash flow over time. 
4. Consider modest yield. I think this is one of the easiest metrics to use. This metric is a measure how much a company pays out in dividends as a percentage of its share price.

Calculation: Annual dividends / price per share = yield

Example: BCE annual dividends = $2.40 / $60 = 4%.

I think you want to own companies that have a low-to-modest yield.  

We prefer owning companies that yield between 3-5%.  

When it comes to higher yields – higher yields (anything over 6%) could be warning sign for trouble – they are a concern for me anyhow that the dividend is not sustainable.

Beyond common stocks there are also Real Estate Investment Trusts (REITs) you could own.

Here is a very quick primer on REITs. 

Step #2 – Consider owning what the big fish own!

Beyond the metrics above, here’s the obvious: consider owning what the big mutual funds and ETFs own. 

Use some low-cost ETFs as a index skimmer. Meaning, if these stocks have been good enough for a multi-billion-dollar fund money manager for the last decade or more they might be suitable for you. This is essentially what I mean by skimming the index.

To skim the index, I use ETFs like XIU in Canada although others will do!

Canadian dividend stock selection still made easy

Step #3 – Consider diversifying by sector

Again, the future is always unknown. So consider diversifying amongst your dividend paying stocks across various industry sectors.

Here is the sector breakdown of the TSX using iShares ETF XIC as an example – a proxy for the broad Canadian market – current to the time of this post:

Image courtesy of iShares.

This means your Canadian DIY stock portfolio may include a few companies in each sector such as:

• Financials – own banks (examples: Royal Bank, TD Bank) and life insurance companies (examples: Manulife, Sun Life) and more. 
• Energy – consider owning companies like Suncor and Canadian Natural Resources; energy distribution companies such as Enbridge (ENB) or TransCanada (TRP) or others.
• Materials – companies like Teck Resources might be consideration.
• Industrials – hard to go wrong with railroads like Canadian Pacific Railway (CP), Canadian National Railway (CNR), and waste management with Waste Connections (WCN).
• Consumer – think grocery chains by owning Empire (EMP.A), Loblaws (L), or go with Canadian Tire (CTC) or Dollarama (DOL) for growth. 
• Telecom – consider owning some of the big 3 telcos: BCE (BCE), Telus (T), Rogers (RCI.B)
• Utilities – I own Fortis (FTS), Emera (EMA) and Brookfield Renewable Partners (BEP.UN/BEPC).
• Health Care – Canada is weak in this sector in terms of dividend stocks. I tend to own JNJ from the U.S. as one of my healthcare stocks.
• Technology – Canada is also weak in this sector so I own ETF QQQ.
• Real Estate – Consider CAR.UN (Canadian Apartment REIT) among others. 

You get the idea, consider owning the market leaders!

Full-on disclaimer alert! Such a list above could be your starting point for your investment research and portfolio considerations.  Even though I may own some of these companies above this list is not a recommendation for any purchase.  Your mileage may vary!

Here is the sector breakdown of the biggest 500 companies in the U.S. market:

Image courtesy of BlackRock.

The same principles to Canada can also apply to your U.S. stocks. You can consider owning the top holdings in each sector as part of the U.S. market (e.g., information technology, health care, consumer discretionary).

Although I own a few U.S. stocks (such as BlackRock (BLK)) I have a bias to owning indexed ETFs to capture returns from the U.S. and from around the world. I will likely invest in more indexed ETFs beyond Canada over time to simplify my portfolio.

In fact, years ago, I used to own a low-cost U.S. dividend fund but have since moved some of that money into tech-growth ETF QQQ. 

I personally feel our Canadian market is very concentrated and dominated by a few companies – so it’s easier to own those stocks directly. The U.S. market is more difficult to select stocks accordingly that may or may not beat the market index. 

Why don’t you just own dividend ETFs?

With all this talk about individual stock selection and holding some indexed ETF products, then why don’t I just own dividend ETFs?  

Great question and I’ve answered this a few times on my site, most notably in this post.

To summarize here are the key reasons why I don’t own Canadian dividend ETFs at this time:

• Some Canadian dividend ETFs have criteria I don’t fully agree with.
• Most Canadian dividend ETFs have a modest fee, I prefer not to pay it.
• I cannot control the stock weightings using a dividend ETF.

Full-on disclaimer alert! Your investing objectives including your risk tolerance are probably not the same as mine. Therefore you might want to consider dividend ETFs or simply plain-vanilla ETFs for your portfolio.  Although I find the concentration of the Canadian market easier to select and hold stocks from I’m personally considering owning more U.S.-listed ETFs over time. Your mileage may vary!

You can read about some of my top U.S. dividend ETFs for your portfolio here.

How do I rebalance my dividend portfolio?

Good question!

I try and rebalance my portfolio by buying new Canadian assets that have been beaten up in price to realign with the sector breakdown of the TSX 60 or whatever iShares ETF XIU holds in various sector weights.

Mind you, I do this with a few caveats:

1. While the TSX Index has had a long-term sector breakdown of many financials and energy stocks, I try and ensure no one sector has more than 20% weight. 
2. I believe it’s best to own more telcos and utilities in my portfolio (than currently weighted in the ETF XIU) given the long-term / juicy dividend histories of those companies. Investing this way, I believe, will deliver some steady income in semi-retirement.

Looking at XIU as a proxy then to start your Canadian dividend portfolio guidance:

• Consider owning <30-35% financials (think banks and life insurance companies).
  • I try and keep Canadian banks to < 20% of my overall portfolio actually, in the name of diversification.
• Consider owning <20% energy (think Enbridge, Suncor, Canadian Natural Resources and a few more).
  • I do not own that much, pipelines and energy make up <10% of my portfolio. Again, striving for more diversification.

Again, I have a bias to low-volatility stocks in my portfolio so I tend to own more telecommunications and utilities than the TSX would weigh near the top right now.

So, for those companies, I tend to own BCE, Telus, Emera, Fortis and a few other companies in greater weights than the current ETF XIU would as part of its top holdings. Again, I do that for juicy dividends AND lower-volatility. 

I don’t worry about rebalancing my U.S. assets. When markets correct, I buy more stocks or ETFs. I don’t really re-balance my RRSP. 

This is a good time to point out I don’t hold any bonds any longer in my personal portfolio – for this reason – although some investors might disagree with this approach.  The way I see it stocks have always outperformed bonds over the long-term and if, rather when stocks tank in price, I just buy more stocks either directly or via indexed ETFs.

When it comes to portfolio management, I’ve learned to celebrate falling prices. I think you should too although I can appreciate this is unconventional thinking.

In the end, I believe investors will be successful if they can do the following things:

1. keep a modest and consistent savings rate for decades,
2. keep their money management fees low, and
3. diversify their portfolio across sectors, companies and countries.

If you use indexed investing, maybe even better because it’s easier for most investors to do so.

As you invest more and learn more, you will likely consider thinking about your assets as a single portfolio, a portfolio that spans multiple investing accounts and even includes your pension if you are lucky enough to have one. I also encourage you to seek out financial professional help if you’re really, really unsure about what to invest in, where and how.  

How I built my dividend portfolio summary

Over a decade ago, I decided to ditch the mutual fund industry and begin my DIY investing journey. I did this to keep more of my money and give less away due to money management fees.

Years ago, switching from mutual funds to ETFs.

Our investing plan is rather simple:

1. I own some dividend paying companies from Canada and the U.S., companies that reward investors through consistent dividend payments every month and quarter, most of them increase their dividends every year, and
2. I own a few low-cost Exchange Traded Funds (ETFs); these funds provide extra diversification.

Thanks for reading and I look forward to your comments as we continue our journey.

Got any questions about our long-term goals or investing approach?

Mark