Reader Questions – How I built my dividend portfolio
Thanks good readers, I appreciate hearing from you and receiving your saving and investing questions.
If you’ve been following My Own Advisor for a while you’ll know I’m a hybrid investor.
I’m happy to own a few low-cost, diversified Exchange Traded Funds (ETFs) to grow my portfolio value over time. I like (and own) these ETFs for their low-cost, transparency, ease of use and performance – because I know the ETFs I own are likely to beat the performance of most active mutual fund managers over time.
For the rest of my portfolio, I use dividend growth investing. This approach by some might be considered another animal altogether but I would argue the high-level objectives of a dividend growth investor are similar to an index investor or ETF investor:
- The mandate to buy and hold the same assets (dividend paying stocks) for many years on end.
- The mandate to avoid trading; avoid portfolio turnover – keeping my commission costs low.
- With dividend investing I’m striving for stock price growth but also growing income for my retirement needs. Dividends paid from my portfolio of 30+ companies can compound over time; paying out more dividends each month or quarter.
- By owning the dividend growers I get paid to own these companies almost regardless of their stock price. I avoid panic selling and other bad investor behaviour gaps.
Since the start of 2018, I’ve received many reader emails and questions. I figured I’d open up and answer some of those questions today. Let’s get into them.
I like your articles Mark. It’s great to see you so passionate about investing. I prefer ETFs myself. With all the benefits that come from low-cost, ETF investing or being an indexed investor, why dividends still? Do you have an article about how you built your portfolio and why?
I get it. Not everyone loves dividends as much as I do. Things makes personal finance, well, personal. Here are my top reasons I still like dividend investing:
- Dividends remain easy to understand. I invest in these stocks, I stay invested, and I get paid for doing so and I get raises. Pretty simple. Dividends remain tangible money I see coming into my account. This is money (thanks to dividend reinvestment plans) that keeps growing higher and higher every month.
- Dividend raises are helping me fight inflation. As consumer prices rise, the cost of living rises. Rising dividends can help combat the higher cost of living. Don’t believe me? Well, my home heating gas bill continues to go up year after year. (I looked at that this weekend while doing my taxes over a few glasses of red wine.) Thankfully with all these Enbridge dividend raises in recent years, we’re now earning enough from Enbridge dividends to pay for that heating bill!
Image courtesy here.
- Canadian dividend paying stocks remain tax-efficient. With my RRSP full of mostly U.S. assets (I have no more contribution room in my RRSP), I tend to keep Canadian dividend paying stocks in my TFSA and inside my non-registered account. Although I prefer tax-free dividends (I have no more contribution room in my TFSA this year), 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. This lower form of taxation will be even better when I’m not working!
Don’t get me wrong reader, ETFs are great. Especially the low-cost, diversified ETFs you can buy and hold.
Mark, I’m considering money that should be used for retirement (and not for any short-term period of time), in 100% equities. Is that too aggressive?
Well, I would say “it depends”. It depends on:
- What are your financial goals?
- What is your tolerance for risk and volatility?
- When do you need the money?
- Can you stomach to see your portfolio value down, possibly, by tens of thousands of dollars at any given time? Will you be tempted to sell equities when you see that?
Personally, before investing in any financial asset like any stock, bond, GIC, mutual fund, ETF or otherwise – put a financial plan in place first. Here are some tips on what your financial plan should cover.
In my own portfolio, based on the plan we’ve devised, I’ve decided that we should be at 100% equities until retirement. This allows us to take advantage of as much stock market growth as possible in our asset accumulation years. In our asset preservation years, that allocation to stocks might change. I’ll tell you where I get there!
Mark, we’re thinking of using a robo-advisor for the convenience it provides. But if I were to go DIY (do it yourself like you), I am also considering an all-in-one fund like Vanguard VGRO or iShares CBN. Is that sensible?
I wish I could tell you exactly what to do and how it could work out for you, but I can’t because honestly, I don’t know what the future holds for any investor – including me.
I can tell you that using a robo-advisor is an excellent choice for at least some of your portfolio because not only do you get low-cost products to buy and hold, you also get some built-in money management advice with the service. Slaying your investing demons (bad investing behaviour) is not easy, and I fight it. I think getting professional investing advice AND assurance you’re in the best financial funds to suit your financial objectives is value for money.
Have a read of these articles below about robo-advisors to help you make a decision.
That Vanguard or iShares fund above looks like solid all-in-one fund. I think DIY investors who no longer want to be constantly watching the markets may gravitate to either. Also, for any new investor, they could consider these products for an all-in-one introduction to investing; holding a fund of funds that provides both low-cost and diversification right out the box – something all investors should keep top of mind!
The markets are acting iffy nowadays. Should I wait a while before making the plunge? I keep hearing a correction might occur – maybe it’s best to hold out investing until then? Buy low right? What are you doing Mark?
Here are my thoughts:
- I have no idea what the market will do tomorrow, or next week, or next month, or next year.
- I have no idea how big or how small a market correction might be.
- I have no idea how long any market correction might last; could be a month, many months, a year of “down markets” or even more.
- I have no idea what the short-term investing future holds.
- I do have confidence that, over many years of staying invested in equities, stocks should perform better than bonds; bonds are likely to provide some small return over cash; cash is good in a savings account for emergencies and other “what ifs” in life.
What I am doing?
- We hold a small emergency fund, so that when $hit hits the fan we have some money.
- We set saving and investing goals and we stick to them as best we can.
- We live our lives and don’t worry about the markets blowing up.
Here is a picture we took in Portugal last fall. I enjoy a nice glass of port now and then too!
I hope that provides some insight.
Here are some other reader questions I’ve answered over the last couple of years. Those blogposts will probably provide more insight as well.
Thanks for being a fan.
To all readers, keep your questions coming and I appreciate your support.