How to get started with dividend investing? I get this question often from readers.
A few months ago I wrote this post about getting started with dividend stocks. In reading that post you’ll come to realize that a company’s assets and earnings can be managed in several ways:
- Management can decide to reinvest earnings and grow the business.
- Management can decide to buy back shares so each remaining share can earn a higher proportion of profits.
- Management can decide to pay down debt.
- Management can decide to pay some of their earnings to shareholders in the form of dividends.
The latter is preferred to me as someone who aspires to, for now, live off the dividend and distribution income paid from our investments. The way I see it, dividends are very tangible while capital appreciation is not. Although both provide an expectation for investors’ returns companies that pay a consistent dividend are typically demonstrating good financial health even though future dividends are never guaranteed. Dividends from companies can be increased (good), dividends can be paid at the same rate (OK), dividends can be cut (can be good and not so good) or dividends can eliminated all together (can be great and very bad). Dividend investing has its dangers but it can be a financially rewarding journey.
At present our dividend portfolio is compromised of about 30 Canadian dividend paying stocks and Real Estate Investment Trusts (REITs) and about 10 U.S. dividend paying stocks. Everything else is indexed for diversification. We hold no bonds because we consider this as our bond.
Back to the original question – how to get started with dividend investing?
First of all I’d probably do more of this should equity markets tank again. If that type of risk is not for you then I’d suggest you start investing in dividend ETFs for the first couple of years. You can find my favourite list here. This way you can buy instant stock diversification at a low money management fee. What you’ll find over time friends is the same Canadian and U.S. stocks that have paid dividends tend to keep paying them (or increasing them). As your portfolio value grows you can consider slowly unbundling the dividend ETF and buying and holding the individual stocks that compromise the ETF. As you unbundle your dividend ETF you can pick up a broader indexed ETF product such as VTI (or VUN) or VXC to gain U.S. and international diversification respectively to complement your Canadian dividend stock portfolio.
That’s an overly simplified way to get started with dividend investing. Simple can work though and a similar approach has worked for us. Consistent saving and investing in Canadian dividend paying stocks is now churning out over $11,100 per year in passive income; the capital that makes this income we won’t need to touch until we want to. It’s the equivalent of a part-time job that we don’t need to work for. A part-time job that will hopefully continue to gain wage increases to fight inflation, pay for our future retirement needs and wants regardless of what the market does or does not do.
How is your passive income journey coming along? How did you get started with dividend investing?
That $11,000 of free money that compounds itself is amazing. I don’t understand why so many other people that are more than capable of utilizing that strategy aren’t doing it. It is quite simple and straightforward. Thanks for the good read as always.
Happy to provide the updates!
What a boring update. Give us some spice. Look at dividend mantra how he does his updates. Give us some stocks you own, which paid you dividends this month. How much you got from them. Frustrating since youre a good blogger but your dividend updates are useless.
Thanks for your comments Greg. I’ll work on spicing them up in the future however I do disclose quite a bit on this site. Like most dividend investors who hold Canadian stocks, I own Canadian banks, telcos, utility and energy companies. Investing is boring though 🙂 I can appreciate the quest for more details and can work on that but the reality is my approach to buying and holding those Canadian stocks and doing nothing but reinvesting the dividends is both boring and working well.
Impressive income. $11K kills a lot of uncertainties.
The dividend Ninja initiated me to dividend investing with only two emails, and I took about 2.5 years to learn value investing and use it with dividend stocks.
It’s coming along thanks. I’ll be VERY happy when we reach our goal – hopefully only 10-15 years away. Keep up the good work yourself.
Good post Mark! I also look at our dividends as being the equivalent of a “part-time job”. My husband is the sole income earner and I’m a stay at home mom and we are lucky enough to manage quite well on my husband’s salary and DRIP the dividends and not touch the income. I view our monthly dividends ($2,300/month) as the equivalent of a part-time job without all of the hassles such as dealing with bosses, commuting costs, office clothing, etc! 🙂
For sure…a part-time job that I no longer have to work for. DRIPping the dividends on a portfolio churning out $2,300 per month is pretty amazing. VERY well done! Your comment is continued reinforcement of our plan!!
I am in my mid fifties and I am wanting to transition some of my real estate holding into a strictly a dividend portfolio. I am debt free and plan to invest $250k this year. There will be a 12-15 allocation period of substantial contributions before I start living of the income. My strategy is to live of the income and never sell the stocks. Please point me in the right direction sir.
Thanks for the comment Jim. Being debt free must feel great. I cannot however offer any personal investment advice on my site for many reasons. You are welcome to read some Archives on my site and learn more about my journey. I would also suggest with that large portion of money to consult a fee-only financial planner who have give you insight into the best products to fit your financial objectives.
Just as an aside, younger folks might not be aware that trading hasn’t always been as easy or inexpensive as it is now. When I think back to my younger days of learning to invest, the options were fairly limited, often slow/cumbersome and costly. With present day technology it is easier than ever to lean and invest.
I try to think in terms of revenue streams. DB pension is the heavy weight for income. Hobby farming brings in decent coin. For now, investment (RRSP, LIRRSP, TFSA) incomes are re-invested often via DRIPing. Will begin removing some cash from RRSP in dribs and drabs just to bring me up to a tax bracket threshold. Don’t need the cash but might as well get some out at the lowest tax bracket. Being debt free helps a LOT.
I like the way you think Lloyd when it comes to revenue streams; I’m optimistic my wife and I will have a few when it comes to income in retirement or semi-retirement. Pension, investments, part-time jobs, blog, other.
Like you I intend to DRIP as much as possible. When I need the money for living expenses I’ll turn off the DRIP taps.
In your position, being able to withdraw from the RRSP because you want to not because you have to must be a great feeling. Very well done.
Good information for investors Mark.
Congratulations on the progress. You have a one track mind when it comes to investments and I mean that in the best possible way.
Ha. Thanks Deane!
Which ETF’s do you have? 30 Canadian dividend stocks and 10 US dividend stocks should provide sufficient diversification when you have index ETF’s as well. Curious which dividend stocks you own. 🙂
$11k in annual dividend is awesome! I’m sure your forward looking dividend is even more.
VTI for one. It’s a stud 🙂 I own most of top assets in XIU and VTI individually. I DRIP almost every one which helps accelerate the passive income towards my goal. I think my forward dividends are more, yes, but I don’t want to count too many chickens too early. Hopefully some more dividend hikes in the second half of 2015!