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?