How I built my dividend portfolio – and how you can too

How I built my dividend portfolio – and how you can too

Inspired by another post this is how we built our dividend portfolio.

You might already know from my site I take a two-pronged approach to investing.

At the time of this post:

  1. I own 30+ 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 diversification and near-market returns. Dividends are great but never a guarantee!

Why dividend investing?

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

Some financial gurus claim index investing is the greatest thing since sliced bread and any desire to buy what you know makes no sense whatsoever.

I disagree.  

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.  It’s money that grows over time thanks to reinvested dividends. It’s money we can use (eventually) to pay for any expenses we need. Chart current to the time of this post but it is much higher now!

Dividends 2017

  • 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. When was the last time you worked, did nothing, got paid AND got a raise in the same year?
  • Canadian dividend paying stocks are tax-efficient. With my RRSP full of mostly U.S. assets, and more low-cost ETFs over time, 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 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 from the U.S. 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.

Why the slight bias to dividend paying stocks?

Dividend investing, if executed well has the potential to deliver market returns AND some sustainable income. 

I love the idea of passive income – it helps me stick to our financial plan. I love the psychological benefits of seeing cash flow into my account. It 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.

  1. 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.
  2. Consider rising cash flow. I have an affinity to companies that grow their earnings and cash more over time.  Here is a simple example below; Royal Bank.

RBC Cash Flow Image courtesy of TMX Money.

  1. 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.

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 skimming the index.

To skim the index, I use ETFs like XIU and XIC 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 your dividend paying stocks across various industry sectors.

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

XIC ETF

Image courtesy of BlackRock.

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

Here are some market leaders and a starting point for your research in Canada or the U.S.: 

  • Financials – own banks (examples: Royal Bank, TD Bank) and life insurance companies (examples: Manulife, Sun Life) and more. I happen to own all big-6 banks myself.
  • 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 Barrick or others such as 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 the big 3: BCE (BCE), Telus (T), Rogers (RCI.B)
  • Utilities – I own Fortis (FTS), Canadian Utilities (CU), Emera (EMA), Brookfield Infrastructure Partners (BIP.UN/BIPC), Algonquin (AQN) and a few others!
  • Health Care – Canada is weak in this sector in terms of dividend stocks. I tend to own JNJ from the U.S. for my healthcare stocks or just VTI ETF.
  • Technology – Canada is also weak in this sector so I own $QQQ for that reason. 
  • Real Estate – Riocan (REI.UN) tops my personal list but there are certainly others like CHP.UN, CAR.UN, and Summit REIT (SMU.UN).

You get the idea, consider owning the market leaders!

Full-on disclaimer alert #1!

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:

IVV ETF

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 I have a bias to owning indexed ETFs to capture returns from the U.S.

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 balanced and 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 #2!   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 I built my dividend portfolio…and how you can too!

Many years 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 a few 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 diversification and near-market returns.

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

My name is Mark Seed and I'm the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, I've surpassed my goal and I'm now investing beyond the 7-figure portfolio to start semi-retirement with. Find out how, what I did, and what you can learn to tailor your own financial independence path. Subscribe and join the newsletter! Follow me on Twitter @myownadvisor.

25 Responses to "How I built my dividend portfolio – and how you can too"

  1. Hello, I’m in Canada as well. What brokerage would you recommend to use to purchase either low cost dividend paying etfs, or pick my own dividend stocks?

    Thanks

    Reply
  2. Hi Mark,
    Do you ever sell any stocks if your capital gains may be taking you over your % asset allocated to that one stock. Ie if you wanted a weighting of 5% but share price increases to the point that this particular stock is now 8% would you trim back to 5%?
    also, for your TFSA…. do you have a specific % you may hold in one particular stock ?

    Reply
    1. Nope 🙂 I buy and hold. I focus on keeping any one stock or ETF to less than <10% of portfolio weight across all our accounts. I think my highest right now might be 6% weight and I’m OK with that for now.

      I rebalance my portfolio by buying assets, not selling. I’ll touch on rebalancing a bit in my next dividend income update.

      I’ve modeled my Canadian stock portfolio after iShares XIU and XEI ETFs.

      Inside my TFSA I have a bias to holding more Canadian REITs. I have the same rule there, <10% for any one asset.

      Thanks for reading.

      Reply
  3. Thanks Lee. Well, I feel like I messed up royally in my 20s with MFs. Ah well, live and learn.

    Now, it’s all about holding many Canadian blue chip stocks, a few U.S. stocks and then U.S. listed ETFs for extra diversification. I think we’ll keep our portfolio this way for many years to come, if anything, we’ll own more U.S. dividend ETFs for income – to use that income to withdraw from our RRSP – likely $10k each per year starting around age 50.

    Happy to get your questions and emails. Everyone learns from someone. Cheers.
    Mark

    Reply
  4. Nice post Mark! As you know I’m a pure dividend value investor. Here are my reasons for avoiding ETFs, and index funds:

    1. ETF/Index funds inadvertently buy overvalued stocks. I choose to only buy undervalued stocks.
    2. ETF/Index funds inadvertently buy lousy stocks. I choose to only buy stocks that satisfy my 12 rules of investing.
    3. You’re still paying fees. I chose to pay the lowest fees possible…..$9.99 per trade and I can hold the stock for 20 years 🙂
    4. Index funds buy non-dividend stocks. I only buy dividend stocks (one exception: BRK.B)

    Reply
    1. Great to hear from you. I hope all is well?

      Undervalued stocks are a bit subjective – otherwise – you wouldn’t have to have your own criteria 🙂 That said, I know what you mean, fund managers are usually forced into buying and selling. They are paid to do it!
      https://www.myownadvisor.ca/in-defense-of-active-investing/

      The other thing I totally agree with you on though is fees. But, if you are going to own ETFs, own low-cost ones and ones that are diversified.

      BRK.B is practically an index fund 🙂

      Reply
  5. Another good article Mark. But don’t be afraid to step on a few toes. Rather than just say own a few of each I’d add in Bold, AVOID CYCLICALS!!!! I don’t say one can’t make money investing in cyclicals, but the topic was Dividends (I prefer the word Income) and most cyclicals don’t fall into my category of being ones with good dividend histories. Most cut their dividend as soon as their price drops.

    Reply
    1. LOL. Well, I do own SU. I’ve learned to avoid most of them cannew, thanks to reading about the experiences of you and many other successful dividend investors.

      Reply
  6. Cool article Mark. You have covered where to look for dividend payers, and what you use to review individual companies. I would be curious to read an individual stock analysis on your part. And also review your portfolio holdings, when you are comfortable to share with us 😉

    Reply
    1. I’m getting more comfortable with time as you can see 🙂 I will eventually disclose my holdings I think but if you read often enough and dig enough, I suspect you’ll find out with some accuracy what I own. Just not how much but again, readers can do some math on that – I can’t make it easy for people!

      Reply
  7. Hi Mark,

    in the dividends chart, does that include all your accounts? TFSA, RRSP, Non-reg? Wondering becuase if you plan on retiring early with $30k dividends a year there may be tax issues with RRSP accounts.

    Reply
    1. My focus is on TFSA and non-reg. accounts = $30k in dividend income per year every year. Once we hit that mark, we’ll start drawing down our RRSPs. Our RRSPs are not included since we intend to draw down those accounts prior to any pension plans from work. What tax issues do you mean? Any RRSP withdrawals will count as income and we’re hoping we withdraw our RRSP funds when our income is the lowest possible.

      Reply
  8. Looking back on our investing journey I see that we did what you are basically doing. Albeit not in such a planned out way. We started with MFs and about 16(ish) years ago started investing in individual companies moving way from MFs. Now the only funds we have are the TD e-series to complement our stocks and park small amounts of cash that is not DRIPped. We do have DB pensions so that comes into play big time.

    About the only thing I’d mention (and I know you already know this Mark) is that there will be corrections along the way so extrapolating what has happened in the past is not likely what will happen in the future. Be prepared for, if not setbacks then at least stagnation of dividends. There was a period where there were not a lot of dividend increases and in fact several decreases were announced combined with a substantial drop in share prices. It can be scary for those not prepared.

    Reply
    1. Upon re-reading the article I see you did mention the potential market and dividend fluctuations. Don’t know how I missed that on the first read. Or maybe I did read it and just forgot by the time I got to the end. 🙂

      Reply
    2. We also have pensions but those cannot be touched without MAJOR penalties until age 65 for me. That’s another generation away 🙂

      Your point about stagnation might come true. I’m not always counting on dividend increases, although if they happen they will certainly accelerate our financial wealth. I’m prepared for stocks to drop 30%. In fact, I expect it at some point like 2008-2009. I hope I have money to invest when that happens and I will do my best to stay the course. Buy, hold and stay invested. Thanks Lloyd.

      Reply
      1. 2008/2009 was 50% drop !!

        Who knows when the shoe will drop next and how heavily?

        I will also do my best to stay the course.

        Good overview for dividend and indexing investment junkies.

        Reply
          1. I use the delusional thinking that if the “value” of our portfolio were to fall by (insert percentage here), we’d still have more than what we originally put in.

            (I did say it was delusional)

            Reply
        1. RBull: Many were 50%, especially banks, but some like FTS and ENB were 20%-30%. Regardless, I was fortunate to buy, though most were not at the low. Still I got a real boost to my total income.

          Reply
          1. Good for you Cannew.

            We’re speaking about the overall market and not individual stocks. Some were more than 50% and some were less of course. I was also fortunate to be in the buying stage of my investment path so had some benefit, as I expect many on here were too.

            In any case the market overall came back within a few years, and those that held on were rewarded, whether through dividends or capital growth.

            Reply

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