Income Investing and My Retirement Strategy – Your Questions Answered
For many years now, I’ve been a huge fan of dividend investing.
Dedicated readers will know I’m on a mission with this strategy – an aggressive one at that – to hopefully earn $30,000 per year in dividend income from a few key accounts.
I figure this income stream, supplemented with other assets (e.g., RRSPs, workplace pensions, other), should set us up well for semi-retirement in the coming years.
While I love dividends, especially from my Canadian stocks, I invest beyond Canada’s borders using some low-cost U.S.-listed ETFs.
You can find some of my favourite ETFs to own here.
I invest this way (more than ever) since I believe in portfolio diversification. In using some low-cost U.S. ETFs, I obtain this diversification and therefore opportunities for long-term growth at a very low cost.
This makes me a ‘hybrid’ investor – using a basket of Canadian (and some U.S.) dividend growth stocks for passive, rising income and using some low-cost ETFs to ride the general stock market equity returns. I believe in this two-pronged approach since it should not only provide some passive income for life, but it should also deliver capital appreciation as well.
Like other Canadian bloggers that I look up to, I’ve been building my dividend stock portfolio (and adding to it) since around 2008-2009. I’m well on my way to earning the desired $30,000 per year from a few accounts – a recent update you can find here.
Should you follow this approach?
Is hybrid investing right for you?
Well, check out the rest of this post and you can decide…
Your Ever Growing Income
My friend and past contributor to this site, Henry Mah, recently released a book called Your Ever Growing Income.
You can read about the Canadian and U.S. versions of that book here.
Henry recent encouraged bloggers and passionate investors like myself to publish some answers to a few questions – about income investing and my retirement strategy.
Today’s post does just that!
Income Investing and My Retirement Strategy
- What stocks should you buy and why?
I have a bias to owning companies that have a long, established history of rewarding shareholders.
You can see some of the very dividend-friendly histories of many Canadian stocks here.
On my Dividends page, I have highlighted some of the stocks I own, they are at the time of this post:
- Canadian banks (examples: RY, TD, BNS, BMO, CM).
- Canadian insurance companies (examples: SLF, MFC).
- Canadian pipeline companies (examples: ENB, TRP).
- Canadian telecommunications companies (examples: BCE, T).
- A few major Canadian energy companies (like SU).
- Canadian utilities (examples: FTS, EMA, AQN and more).
Basically, I buy companies that people need. People need to bank, so I own banks. People need insurance. Last time I checked people want to heat and cool their home(s) in Canada, so I own those companies too. I think you get the idea…
I also own a number of Real Estate Investment Trusts (REITs). Examples include REI.UN and CAR.UN.
I tend to own what the big funds in Canada own. I don’t pay any money management fee to do so.
Image courtesy of iShares.
- How do I evaluate the merits of the stocks I am considering?
My approach is rather simple:
- If the Canadian company pays a dividend, I might consider it.
- If the Canadian company has paid a dividend for many years, as in decades, I will consider it.
- If the company has raised their dividend for decades or generations, I probably already own it.
As part of my portfolio, I also consider the following when buying and holding stocks:
- Sector diversification – given Canada is dominated with financial and energy sectors, I try to invest in healthcare, consumer stocks and technology companies state-side via low-cost U.S. ETFs.
- Earnings – I look at company earnings for any longer-term warning signs.
- Payout ratio – I look at the company’s dividend payout ratio for any flags.
- High yield – I try to avoid chasing yield since I believe consistent dividend growth and increases (ideally year-after-year) are some keys to wealth creation; not owning a high-yield stock whereby the dividends are likely unsustainable.
- When should you invest more money into new stocks or the ones you already own?
I can’t predict the future…although I wish I could.
For the most part, I don’t deviate very far from the existing 20-30 Canadians stocks I own. I tend to buy more shares in the stocks I own when they’ve been beaten up. If people have a hate-on for banks, I buy them. If REITs have been punished of late, I buy those. You get the idea. I hope to rinse and repeat this approach until wealthy.
That means, I’ve essentially unbundled the top-Canadian ETFs like XIU, XIC, VCN and a few others for passive income.
Maybe you shouldn’t take my word for it. Here is some very sage advice:
“The selection of common stocks for the portfolio of the defensive investor should be a relatively simple matter. Here we would suggest four rules to be followed:
- There should be adequate thought not excessive diversification. This might mean a minimum of ten different issues and a maximum of about thirty.
- Each company should have a long record of continuous dividend payments…
- Each company selected should be large, prominent, and conservatively financed…
- The investor should impose some limit on the price he will pay for an issue in relation to its average earnings over, say the past seven years.” – Benjamin Graham, considered the father of value investing; most well-known disciple of his teaching: Warren Buffett.
- When should you sell your stocks?
I mean it.
As long as the dividends are paid and continue to increase year-after-year, I will own the stocks I do: the banks, the utilities, the pipelines, the telcos, and so on,
That said, no company nor investing approach is perfect so if the company you own, stopped increasing their dividends for a few years, it might be time (depending upon the broader economic climate) to ditch the company.
- Should you be worried when the market and prices are going down? Why?
I mean that too.
Consider stock prices going down like a sale.
Investing in the stock market seems like the only place in the world where people don’t celebrate paying less for something they want to buy.
If your intention, like mine, is to own a basket of dividend paying stocks that have a long track record of rewarding shareholders with raises, then you should really learn to train your investing brain and look at broad market declines as a great way to celebrate buying stocks on sale.
Here’s how to prepare for any market meltdown.
- Should you diversify into other stocks, sectors and markets?
That really depends on your investing approach and broader financial plan.
Here are some thoughts on what your financial plan should cover.
For the investing portion of my financial plan, I’ve gravitated to dividend paying stocks and low-cost ETFs for a punch of diversification across sectors and multiple markets. Your mileage may vary!
- Should you worry about asset allocation and rebalancing? Why?
Yes and no.
At this point, I don’t own any bonds in my portfolio.
I’m very fortunate to have a workplace pension and because of that, I consider my workplace pension “a big bond”.
That said, there is merit in putting certain stocks (or ETFs, or bonds) in certain investing accounts – asset location is important.
I wrote a comprehensive post about taxable investing here.
Here is the tax friendly nature of Canadian dividend paying stocks.
There is also merit in portfolio rebalancing but I would argue you can rebalance a stock portfolio in your asset accumulation years through buying assets/stocks (not selling them). When you are into your drawdown years, i.e., retirement, you can consider selling assets/stock shares periodically on your own terms.
That’s part of the beauty that comes with dividend growth investing – you can largely decide when you want to sell the shares for additional income.
One the greatest threats to any retiree is running out of money or outliving their money. The way I see it, having a money problem/tax problem in retirement is a great problem to have all things considered.
If you worry about stock market declines; you worry about selling stocks because others tell you to, you might have too many equities in your portfolio.
If this is not your worry, then I suggest you strongly focus on dividend increases from the dividend paying companies you own and celebrate those raises when they occur.
- Should you worry if your stocks don’t perform as well as the market? Why?
“Worry” is probably the wrong word to use here.
A simple formula to remember is this:
Dividends + Price Growth = Total Return.
You should know there is always a trade-off with dividends and price appreciation. They are somewhat two sides of the same coin.
If you are striving for some healthy dividend yield in the range of 3-5%, then, some capital growth might suffer.
Want to see your stock prices rise? Well, the dividend company you own might deliver lower dividend yield (e.g., closer to 2%).
You can’t have it all folks.
Nothing is guaranteed with investing – but dividends are very darn good.
I’ve been fortunate with my Canadian dividend stock portfolio for the last decade, since it has largely returned the same (if not better during some periods) as the benchmark index I measure it against: ETF XIU.
You can check out some details about benchmarking here.
I guess that is not surprising though. I own many of the top-stocks the top-funds own and I don’t trade in-and-out of these stocks so I’m not wasting transaction costs either.
Will my string of luck or good fortune or skill continue? I actually have no idea but I’m banking on the fact that if I continue to own the same top-stocks the big funds own in Canada, for many future decades, I think I’ll do just fine with my own DIY portfolio thanks very much.
- When should you invest in ETFs, mutual funds, bonds and GICs?
I mean, what does your financial plan say?
Personally, beyond some low-cost U.S. ETFs I don’t bother with mutual funds nor bonds nor GICs right now.
I’ve owned some of these products in various quantities in the past, but I have no short-term intention of owning them again. I feel my hybrid approach to investing is working very well in my asset accumulation years. Going with a 100% equity approach is helping us realize our goals.
At the end of the day, that’s all that matters for you too…
- How do you determine how well your stocks are performing?
While benchmarking my portfolio is important (see above), I’m more focused on an income stream for my semi-retirement in the coming years.
That means, I focus on the income my portfolio can generate (and how that should increase with time thanks to dividend increases) – so income can cover my needs and wants. This also means, based on the two-sides of the same coin message I shared above, I can rely less on the hope of capital gains to fund my financial future.
Here are 10 ways I will get retirement ready.
What items would you add to my list?
I enjoyed these questions and I hope you enjoyed my answers. Henry’s questions provided me with some great food for thought – if nothing more – to challenge some of my financial assumptions.
There is, ultimately, no right or wrong way to invest. There is no one-size fits all. Anyone telling you otherwise is foolish and trying to sell you something.
There are some time-trusted ways to think about investing. I’ve eluded to some of those ways in this post and hopefully my answers can highlight some considerations for you.
I would love to hear your take.
As always, happy investing!
Been investing since I was 24ish, 56 now. Way back then I was told to read the Wealthy Barber. That set the tone of my investing ideals.
This summer I read ” Your ever growing income “. I actually read it twice in one afternoon because I thought I was missing something. Its such a simple way to invest. By far the best finance book I have ever read. In one week I collapsed all 4 of my portfolios and implemented the dividend growth strategy. I have now purchased 12 books and given them out to friends and family. Where was this book 30 years ago, I would be long retired by now. Keep up the good work.
Great to see you back Anthony.
Henry’s book was great wasn’t it?
Did you see my reviews and interviews with him?
Thanks for the kind words Anthony. I’ll keep doing my thing including reinvesting my dividends. All the best to you.
Good post. Good strategy.
Thanks again Dale 🙂
Interesting point in a Globe story this morning. “Strategic Reserve Account”
This is sorta what I did when I moved some equity into GICs in the fall of ’17 except I allowed for a longer period. I sheltered enough to last more than the three years mentioned.
Good article. I liked these points:
“60% equity, 40% fixed income portfolio does not offer meaningful diversification as it is an outdated simplified estimate of a balanced portfolio.”
“One year’s worth of retirement income is held in a high interest savings account. Income for year two and three are held in short-term instruments. This permits the remainder of the portfolio to recover from the losses while the income for the next three years has been accounted for.”
Sounds like a great cash wedge strategy:
“The first line of defense in preventing large losses is to have a properly diversified portfolio.”
“What is required to fully diversify portfolios is the use of alternative asset classes such as private equity, private debt, real estate, natural resources, precious metals, hedge funds, and infrastructure. Allocating to this complete range of asset classes is referred to as the Endowment Model.”
It might be a fair comment re meaningful diversification as I note many large pension funds have elements of these more “exotic” types of investments he advocates. We are seeing ongoing extreme low interest rates, possibly questionable equity valuations and years of high government debt & QE engineering much of this, and this may require some to consider other options. I believe the type of alternative investments mentioned has typically been difficult for retail investors to access. I am assuming his portfolio management is not cheap and there is benefit to him to promote this approach that also likely has some entry qualifications such as being an accredited investor.
I believe its important to figure out what amount of income protection is needed and for what time frame to determine the size of cash wedge and other FI instruments (if desired) and what I am working on rather than chase a certain ratio of equities to fixed income, notwithstanding if a person desires the other investments mentioned.
Of the people that disagree with a traditional 60/40 approach I wonder how many are planning to follow his Endowment Model to ensure a “properly diversified portfolio” and “fully diversify”? I am very doubtful I will because of the near impossibility of building this type of portfolio as a DIY and near certainty of expensive management fees otherwise. It looks like I will have to settle for “some amount of an outdated simplified estimate of a balanced portfolio”. At this time I remain confident it will continue to serve us fine.
Well I managed to get my 24k run in this morning and am now settling back to watch the Hurricane show unfolding here. Hopefully it won’t be one to
finish sentence LOL
….create hardship for some folks.
Thanks for this detailed breakdown. I’ve not personally dabbled in dividend investing yet, but am starting to make plans for what to do with newly freed up cash flow in the next year. You mentioned that you are content with your current strategy at least in the short term, while still in your asset accumulation phase. I am wondering whether your strategy will change at all once you are in “full retirement”, or whether you plan to maintain this hybrid approach for the long term?
Good to hear from you Elise.
I think short-term, no changes. Longer-term, I might even own some bonds but I will likely own some more U.S. ETFs to further diversify away from Canada. Otherwise, same boring get wealthy eventually plan.
Hey Mark, great post! I’m one of those people that have proven that the (self directed) dividend strategy works. My wife and I are retired now for about 7 years.
Lots to read and digest here, for myself, and my kids to read at some point. I’ve saved this post to return to it. Almost a step by step for new investors!
Great stuff Paul. 7 years. Well done!
I found Henry’s questions very good for me for reflection.
All good answers Mark and if I were your age, at this time, I’d be 100% along with them. The information available on the internet, new investing products and plans available today is heads and shoulders over what I had in my “yoot”.
Thanks Lloyd. You’ve validated my thinking. I feel 100% equities right now works but longer term, who knows, I might actually own some bonds for any downside protection.
Mark: Thanks for contributing to my Income questionnaire. I’m sure your detailed answers will surely answer any questions those new to this investing strategy, or even if they follow a different strategy might have.
Check out the other answers from The Stock Market Speculator and Million Dollar Journey at my site.
I enjoyed those answers as well. All the best and happy to contribute.
Very helpful post. RE question 10, do you recommend any spreadsheet templates for tracking your portfolio?
Thanks to a past reader question, I have posted a simple dividend (or ETF) tracking tool at the top of my “Helpful Sites” page here:
More tools will be shared and posted over time.
Hope that helps!