I recently read some articles over the last few weeks about resolutions for investors this year. With oil prices tanking and our Canadian dollar dropping like a stone, I thought I’d offer my own take, when it comes to my approach to dividend investing so here goes.
- Stay an owner
My intent (easier said than done when stocks are falling…) is to buy and hold companies that have a long history of rewarding shareholders. Yes, the market is a mess right now and it could drop much further but I’m confident the companies we own will not only survive this market downturn but most of them will continue to pay dividends during it. I’m also an owner in thousands of companies via low-cost Exchange Traded Funds (ETFs) so this provides me with some additional diversification.
- Be patient
If the stock market falls 10%, 20%, or even 30%+, and it worries you, you probably have too many equities in your portfolio. Stock market corrections and crashes, can, do, and will happen. It’s not fun watching our small portfolio dive in value but it’s absolutely normal and it’s part of the risk that that comes with equity investments. There must be patience that comes with short-term market pain for long-term market gain, although capital gains are never guaranteed. I have to be patient for the future: by staying invested equity returns over the coming decade should return more than fixed income investments and fixed income should return more than idle cash.
- Reinvest dividends (and distributions)
Although retirees certainly don’t want to hear this, and I don’t blame them, investors saving for retirement should be cheering for stock market corrections so they can deploy their money into equity investments at lower prices. This is where I believe reinvested dividends (or distributions) can help all investors. By reinvesting the cash paid to shareholders, including times when the market is diving downwards, investors in their asset accumulation years can embrace fallen markets allowing the power of compounding to take full effect.
Remaining an owner, staying the course and reinvesting the money paid, these are three simple things dividend investors can do to build their financial nest egg. Simple doesn’t always mean easy though.
Mark
My name is Mark Seed - the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, I'm looking to start semi-retirement soon, sooner than most. Find out how, what I did, and what you can learn to tailor your own financial independence path. Join the newsletter read by thousands each day, always FREE.
What about calling this article: 3 tips for index investors like me. I guess the same rules apply
1-Stay an owner: Stick to the plan and while in build up stay invested all the time. Do not try to time the market
2-Be patient: A hard one for me, I have no patience… Investing is for the long term
3- reinvest dividends
As I have picked ETFs that do not pay dividend, I can stick to 2 simple rules… 🙂
Well said Amber. I think the reality is, many dividend investors are not unlike indexers with rules 1-2 or even rules 1, 2 and 3. You can also reinvest distributions paid from your ETFs, as you know.
The big difference between some dividend investors and indexers – dividend investors are assuming by their hand-picked stocks, they might outperform the index AND they prefer more income and less capital appreciation, since dividends/distributions and price gains are often two sides of a coin.
Thanks for reading.
Mark
I overcome the need to beat the market and outperform by having a small play money portfolio. Here, I can go “wild”. Having this allows me to stick to the plan elsewhere.
I recall this is the 10% rule from Andrew Hallam – the “if you just can’t help yourself” money where you keep 90% in indexed products but “play” with 10%.
https://www.myownadvisor.ca/my-favourite-takeaways-%E2%80%93-millionaire-teacher-and-free-book-giveaway-part-33/
My Favourite Takeaways – Millionaire Teacher and FREE book giveaway (Part 3/3)
Posted on December 7, 2011 by Mark | 21 Comments
Over the last couple of weeks, in Part 1 and Part 2, I raved about Andrew Hallam’s book.
I have good reason to.
I consider Millionaire Teacher a gem for your personal finance library because it is an excellent and an enjoyable read.
Andrew goes beyond the technical and academic merits of spending less than you make, investing for the long-haul and digs into the behavioural challenges that come with investing. He understands people and his book helps people get out of their own way to be financially free, faster.
For today’s post, Part 3, I’m going to wrap-up my favourite takeaways from Andrew’s book and share his remaining rules of wealth we should have learned in school.
First, a quick recap of rules 1 to 4:
Rule 1 – Spend Like You Want to Grow Rich
Rule 2 – Use the Greatest Investment Ally You Have
Rule 3 – Small Percentages Pack Big Punches
Rule 4 – Conquer the Enemy in the Mirror
Now, let’s move on to Andrew’s other rules…
Rule 5 – Build Mountains of Money with a Responsible Portfolio
Many folks complained about their portfolios after the recent Great Recession rolled through, whereby most equity markets plummeted 30-40% off their peak values.
While these investors had a good reason to complain, the way Andrew Hallam sees it, “only an irresponsible portfolio would fall 50 percent if the stock market value were cut in half.” What is he getting at? Andrew says bonds are parachutes for an investors’ portfolio. Sure long-term, we all know, bonds don’t make as much money as stocks but investors need them because bonds are less volatile; when the stock market tanks Andrew says bonds are your friend. These IOUs in government or corporate debt are relatively safe. “If you’re looking for a safe place for your money, it’s best to keep it in short-term government bonds or short-term, high-quality corporate bonds.”
That’s a great tip Andrew. There’s plenty more in Millionaire Teacher.
Rule 6 – Sample a “Round-the-World” Ticket to Indexing
Rule 6 was a great chapter in Millionaire Teacher because it began to profile real investors Andrew has helped. Take “Kris”.
Kris’s portfolio is comprised of just three indexes, 35% in a total U.S. stock market index fund, 30% in an international stock market index fund and 35% in a total bond market index fund. Over time, Kris is not guaranteed to beat every actively managed mutual fund manager Andrew Hallam notes. Kris is however, assured to beat most of these fund managers since Kris is paying rock-bottom fees that don’t eat into his indexed returns, returns that must be greater for actively managed funds to offset the fees (and benefits) of that active management.
With indexing, Andrew confidently tells us “nobody is going to know how the stock and bond markets will perform over the next 5, 10, 20 or 30 years. But one thing is certain, if you build a diversified account of index funds, you’ll beat 90 percent of professional investors.”
Rule 7 – Peek Inside a Pilferer’s Playbook
In this chapter, Andrew tells us to be wary of financial advisors, our financial institutions, and their “playbooks”. Learn to fight the salesperson rhetoric.
“Walking into a bank or financial service company, we’re then settled into plush chairs across from a financial adviser selling us on the merits of his ability to choose actively managed mutual funds.”
These advisors are making us feel comfortable for sure, because they want to sell us something, but the merits of their investing abilities over indexing are only good in theory. The financial advisor may suggest they understand the markets, the fund manager knows how to “get in” and “get out” of assets before they drop or climb in price, but it’s just chatter. Nobody can predict the future of the markets.
Andrew isn’t saying the entire financial industry is rigged against you, just most of it.
Read Millionaire Teacher and Andrew will help you put the highest odds of investment success in your favour.
Rule 8 – Avoid Seduction
Every investor makes mistakes, even great investors make mistakes. Don’t beat yourself up. In fact, learn from your silly mistakes. That includes avoiding investment schemes that provoke greed.
Andrew Hallam has made a few mistakes himself and shares them in this chapter, brilliantly. Here’s a few takeaways from Andrew’s book, what we should avoid:
Avoid high-yielding bonds called “junk”. Avoid fast-growing markets because they can make bad investments. Avoid gold as an investment. Andrew will give you a host of reasons why in his book.
Rule 9 – The 10% Stock-Picking Solution …If You Really Can’t Help Yourself
When Andrew Hallam delivers seminars on indexing, he said many women who attend the seminars learn to put together a pretty diversified portfolio. He isn’t surprised by this by any means, only worried – the husbands will mess the portfolio up! Andrew feels women might make better investors than men because men often run the risk of, well, being men – imploding their investment accounts by chasing hot stocks and other fads. Basically too much testosterone gets in the way.
In this regard, if you feel the urge to buy common stocks (like I do) and you really can’t help yourself from being a shareholder (like I am) then do so using only a small percentage of your portfolio. Set aside a small proportion for stock-picking and keep the rest, 90% in a diverse set of indexed products.
By DRIPping most regular dividend paying stocks that pay quarterly, a person is technically giving themselves a raise every three months. Throw in some trust funds and other companies that pay monthly and these raises come every month with each new DRIP. The market will fluctuate and a person will be picking up more shares when the stock values are lower thus increasing yield. All these income increases will take place without a person doing a darn thing, what’s not to love?
I keep all my REITs that pay monthly distributions inside the TFSA, and I can see the snowball working. Owning some REITs makes me nervous given how beaten up this sector is, but I continue to trust this sector will rebound to some degree.
Quit checking the value your portfolio every day is probably a good resolution for long term investors like us. 🙂
Probably, yes 🙂
https://www.myownadvisor.ca/three-bad-investing-habits-im-going-to-kick-this-year/
Hardly ever check portfolio value, rather dividends paid and increases, like the 3.8% increase paid by NA.
Just read this (Ben Carlson):
http://awealthofcommonsense.com/getting-to-4/
“It’s counterintuitive, but one of the most consistent forms of investment income actually comes from the stock market. Although stock prices themselves are quite volatile, the cash flows companies collectively pay out to investors don’t really fluctuate as much as one would think.”
Make of it what you will.
I haven’t done the research and Ben has, so it’s hard to argue with the facts:
“Rarely do dividends fall and when they do it’s not nearly as much as the stock market.” Agreed.
“For those investors who still have plenty of time to save and invest, this analysis gives you a sense of the potential compound interest you can earn from a continuous reinvestment of dividends over time. Those cash flows can start to snowball eventually and take on a life of their own.”
Correct and I’ve been basing my investment strategy on this very premise for years now, I likely always will. Thanks for sharing Ben’s article with me. I will drop him a line.
Mark
SST: Nice article and if one concentrates on a narrower group of dividend growth stocks, rather than the market as a whole, the numbers should be even better. Don’t reach for high yield, carry some low yield with good growth, hold a majority with average or above yield with consistent growth.
You don’t need to own the most, but the best!
Another great article Mark. I’d just like to add:
4. When the price of your “companies that have a long history of rewarding shareholders”, drop and continue to drop, buy more shares to increase your income and lower your Adjusted Cost Base!
“Although retirees certainly don’t want to hear this, and I don’t blame them,” accept for those who have invested for the growing income! Their income may not be affected by dropping prices and likely, they are reinvesting a portion of their dividends which will be producing even more income.
Very true, buy when stock prices are lower. It’s counter intuitive for many investors but it’s absolutely the right thing to do.