March 2012 Dividend Income Update
As an investor I should never lose sight of the risks direct stock ownership can mean. Apple was a dud years ago and now look at this company, their “i” products are everywhere. Nortel, well, you know the story. Research In Motion (RIM)? The story has yet to be told but things don’t look promising long-term. There are definitely risks to direct stock ownership and who knows what the future holds.
I’ve learned making a bet on one company and expecting a windfall is foolish. For example, I used to play penny stocks as part of a get-rich-quickly scheme in my 20’s and I can tell you it doesn’t work, at least for me it didn’t. I lost money. Making a bet on a few companies is not enough to hedge equity market risk either. Thinking about Easter recently, that’s too few eggs in your basket. Trading? Forget it, that’s not investing in my opinion. Instead I believe great success can come from owning established companies outright, a bunch of them and rarely selling them. I believe buying, holding and building a diversified portfolio of companies that have a solid history of paying dividends can be excellent strategy for wealth creation. I believe in this approach so much I’m putting my money where my mouth is.
Over the last month or so, I picked up shares in Manulife Financial (MFC) under $13. That stock is now DRIPping synthetically every quarter, growing my dividend income. If I can’t determine what companies I should buy or the stock price isn’t right for me then I buy proven ETFs for part of my portfolio…and maybe I always will. This way, the diversification is already packaged for me. To this point, last month, I bought some XRE under $16. This purchase provided more diversification in Real Estate Investment Trusts (REITs) and keeps me around my desired asset allocation for this class. The yield for XRE is rather healthy as well, over 4.5%.
As of last month I now own 23 Canadian companies directly. Add in XRE for good measure and the portfolio is starting to take some shape; ownership in financial, material, energy and telecommunication industries. I’m starting to become diversified. With most of my RRSP tied up in broad-market ETFs like VWO and XBB that follow the equity and bond markets passively, and a few U.S. dividend aristocrats for good measure, I’ve chosen to invest predominantly in Canadian dividend paying stocks in other accounts. There is a great distance to go to reach my goal of 40 Canadian dividend paying stocks, DRIPping in my accounts with moderate diversification but I’m running in the right direction.
As of the end of March, after dividends were paid and reinvested wherever possible, our dividend income for the 2012 calendar year is now projected to be just over $5,500. We’ll hit this target in December 2012 as long as dividends aren’t reduced, dividends are reinvested and the companies we own keep paying them. Who knows, it might be even higher!
I’ll never be able to entirely set and forget my dividend investing approach but I really don’t mind. Dividend investing takes some active work but the dividends flowing into my account certainly don’t. It wasn’t always this way. Penny stocks, mutual funds and other approaches bombed and failed and I got burned. This approach coupled with my passive ETFs though, is definitely working to date.
Over time, whatever the future holds, the more companies I own that pay dividends the less I have to worry about where our retirement income will come from. Now that’s a story that looks promising long-term.
Rather then try to buy 40 separate companies + XRE
…why not buy something like ishares XEI -> with ~74 Canadian holdings, and distributions around 4.6%
XEI holds most of XRE (all but boardwalk) and most of XUT in it as well?
Thanks for the question Reggie.
You’ve got a good point, but when I look at XEI, I see very little history and would be a bit hesitant to own it accordingly. The 5-year return, based on the benchmark index is under 1.5%. Not good. As for the yield, not too shabby, about 4.5%. I’m currently getting this yield in my portfolio, with just as much upside as XEI and no MER.
The reasons I choose to hold dividend paying stocks outright:
1) It’s easy to understand – I invest in a diversified basket of companies with a track record of raising their dividends, and my income will grow over time and as well as my share price. Win-win.
2) It discourages trading – it’s a great incentive to stay invested and stick with a plan. I have no MERs to deal with either.
3) I’m lazy and so is my passive income – I’m getting paid to do nothing, although I suppose the same can be said for indexing.
4) Dividend stocks are a hedge against inflation – many investments currently yield the rate of inflation, and if that’s the case, you’re losing money on a real return basis.
5) It works. I recall many studies over 30 or 40 year periods stated dividend growth companies produced an average annual total return over 10%.
Also, I continue to see my dividend income rising month after month after month, because most of my dividends are always reinvested.
I’m not against indexing, I do it actually for a big part of my portfolio, but I like owning dividend paying stocks for the passive income and flexibility to do whatever I want with that income, and take the dividend tax credit as well. 😉
A long answer to your short question, but I hope I’ve explained my approach.
I hope you continue to follow my blog, contribute and question my approach. I enjoy the discussions.
Great stuff, Mark! You’re building up a warchest of financial independence that will see you through the years to come. 🙂
Thanks Kevin. I’m doing my best!
This is nice, all the dividends coming in passively. Gotta love it. = ))
I know you held TransAlta previously? Do you still hold and DRIP that one? I am thinking of adding it, due to recent price drop, but feel it’s pretty darn risky at this point. What do you think?
Yes, I still hold TransAlta. It comprises <1% of my portfolio, so I'm not too worried. If the dividends get cut, then I have a decision to make. Until then, I'm holding. I think the company is a bit risky. There are other stocks worth buying, in the energy sector, that have less risk.
Great post Mark!
23 companies + your XIC and XIU + your bond ETFs = awesome income! 🙂
Now you can just sit back and relax and let all the dividends and distributions roll in. Congratulations on all the years of hard work to get there MOA! Nicely done. Looks like your set for early retirement!
The Dividend Ninja
Yeah, I’m getting there.
They can’t all DRIP yet in my brokerage account, but over half of them can. Once I get 40-50 stocks DRIPping, the retirement plan will be in full gear!
Very impressive. That is great work getting diversified and your approach is definitely working. Keep it up.
It’s taken me many years to get to this point, but the strategy seems to be working. I apprecicate your support and following along.
Congrats on a productive first quarter. That is great. Hopefully things keep looking up.
Thanks Miss T., I hope so too! Onwards and upwards.
Great stuff Mark!
You’re doing great as always. Keep up the fantastic work.