Welcome to my latest dividend income update. For those of you new to these posts on my site, every month I discuss my approach to investing using dividend paying stocks and how reinvesting the dividends paid from the Canadian companies I own are helping me reach financial freedom.
Recently, I played golf with a very sharp economist whose opinions on investing I value greatly. During our round, amongst other topics, we chatted about the perceived housing bubble, Canadians’ debt load and the stock market. A few things stuck with me from our conversation between fairways and greens. One thing was the perceived patience this economist has when it comes to managing his portfolio, commenting “the average investor does not have enough patience to see things through”. He reminded me most investors worry about daily or weekly market fluctuations. My golfing partner focuses on long-term goals that extend over many years instead.
Another thing my golfing friend mentioned was the relative simplicity that should come with investing, where he said “I don’t think portfolios need to be complicated, in fact, they probably shouldn’t be.” The economist was an investor in many stocks but in recent years he has started to transition his portfolio out of multiple stocks into a focused basket of diversified, low-cost Exchange Traded Funds (ETFs).
In recent months, I’ve been thinking something similar. I believe I own enough Canadian dividend paying stocks (30) and it’s time to start investing more passively across my portfolio. I still intend to keep the stocks I own for many years to come, and reinvest dividends along the way, but where it makes sense I’m going to start investing more in low-cost broad equity ETFs. I’ve come to the conclusion it just makes so much sense to do so.
What does this mean for my monthly dividend income updates? I’ll still post them but they’ll include both dividends from Canadian companies and more (new) distributions from ETFs.
Thanks to Canadian companies that pay regular dividends (and ETFs that pay distributions) I’ve calculated we’re on pace to earn $7,250 in tax-efficient and tax-free income (thanks TFSA) by the end of this calendar year. This should occur as long as dividends and distributions are paid at their current rate. This is an increase of just over $100 beyond last month’s income projection. We’re still a long ways away from our retirement income goal but we’re moving in the right direction.
What’s your take on dividend investing? Do you invest using a blend of individual stocks and ETFs like I do? Do you think I should change the way I report these updates with this news?
Hey my own advisor
Funny how you say you’ve been thinking about passive investing.
I too have been thinking about it more lately- even after I switched!! But for the reason of having our first child, I find it very tiring and time consuming. When I do have time, (which is not often with a new born baby,) I don’t really want to deal with managing the accounts and 30 stocks or worring about earnings, etc. Where to add money, etc. I can see the beauty in a set and forget couch potato with 0 risk of bad stock picks or underperformers.
Most of my US holdings have underperformed the s&p500 this year but thankfull the CAD holdings and pension are outperforming. The end result is the overall returns are simular to a plain couch potato YTD
If I look back and benchmark previous years, they are so close to passive indexing that I wonder if it’s worth the time now. I would like to focus on other areas of life such as having fun and family now, it would be nice to have something rock solid without any worry.
Also as you, I or anybody start to accumulate assets, (6-7 figure portfolios) the cost of underperformance becomes huge, to the tune of $10-30 thousands dollars for example.
A 5% underperformance would cost 50k on 7 figures, and I can tell you my US stocks have underperformed the s&p500 a lot more than that.
I don’t have 7 figures yet, but we could easily be there within the next decade.
I wish I had a 7-figure portfolio 🙂
Underperformance is very costly…for sure, which is another reason to index. I don’t have to worry about any underperformance.
If my wife and I continue to have good health, and jobs, we should hit seven figures before age 50.
Great to hear from you.
Well, at last count, I own 27 CDN stocks, then all pay dividends, and that’s probably enough 🙂 I will likely put XIU into my TFSA, I keep XIU in my RRSP as well.
There is absolutely some beauty in the “set and almost forget” strategy that is Couch Potato investing.
Actually, my U.S. holdings have been good. Over the last couple of years, a few of them are over 40% returns. I think I got lucky!
That said, I know the benefits of indexing and I will be doing it more going forward, especially since many of my individual stocks are DRIPping.
Great job Mark! It seems not too long ago that you were on your way to “only” receiving $6,000 for the year in dividends! Next stop – $10K!
I’ve also toyed with the idea of investing in an ETF in my TFSA but right now I am 100% stocks.
Thanks Calgary_Girl. It’s nice to see the plan working even with the market being so volatile. I will probably keep every stock I have, just start dabbling with a few ETFs like XIU, ZCN in my TFSA. We’ll see!
I am fairly new to your site so my apologies if this info could be found elsewhere. I have 2 questions for you…
1. Are all of your stocks and ETFs held/going to be held inside your TFSA?
2. The $7,250 you earn (is awesome), but is it all reinvested through DRIPs? Or only partially? Is there a point where you will discontinue DRIPping and take the money and run?
Thanks in advance for the answers! Early on, I am a big fan of your blog and look forward to reading through the archives if I ever get the time to!
Don’t apologize Bryan and happy to answer any questions you have. Welcome to the site and I hope you sign up via email.
1. No, not all my stocks are held inside my TFSA. When I write these posts, I say “tax-efficient” because many Canadian stocks are held non-registered. Some CDN stocks are held in the TFSA though, tax-free dividends. I also hold US companies, but that’s via ETFs and stocks in my RRSP. It’s the best spot for them. You can read more about that, why, here:
2. Most of the money is being reinvested, which is why in part the income keeps going up every month. Instead of the money coming in and sitting in cash, the money made buys more stocks and the more stocks buy more dividends. The DRIPs I run are now full DRIPs, not partial DRIPs. I have started to “turn off” the DRIP taps for a few holdings, because I feel I am overweight in them. I will do that over time as my allocation gets out of whack. Then, I will simply invest in stocks when I feel the prices are right.
I look forward to more visits from you Bryan. Happy investing.
I’m still reliving in my mind’s eye that birdie on one of the holes.
The scores on the rest of the course have somehow disappeared from memory.
That was a great chip in Larry. A great shot. I was also fortunate to tie you on that hole 🙂 For someone that never plays, you played well and should be pretty happy. We’ll get out again.
Was reading about your strategy about keeping Canadian Dividend stocks in an unregistered account. Does the preferential tax treatment on dividends really outshadow the benefits of both the dividend income growing tax free for the next 10-20 years, PLUS the dividend income of the invested tax refund you would get from going the RSP route? I am not one to take my tax refund and splurge it on consumer toys.
Thanks for your question. I keep my CDN dividend paying stocks unregistered for now, but I also try and max out my TFSA every year (and have) and then optimize my RRSP.
As your income bracket goes higher, the benefits of keeping any stocks unregistered goes down. That said, I still like keeping some holdings unregistered as a larger emergency fund and potentially, to make a lump sum payment and kill the mortgage early.
In terms of the tax consequences, most investors are best served by filling up registered accounts first (TFSAs and RRSPs) before owning anything non-registered but it depends on your investing goals. The problem with the RRSP, at some point, you need to withdraw the money and personally, I have no idea when I will need to do that. It will be in a lower tax bracket though.
I think the preferential tax treatment on dividends may not be as good as investing in the TFSA + getting tax refund but I’m running out of RRSP contribution room, so I only have non-registered left. RRSP contributions for my wife and I should be caught up in the next 5 years.
Thanks for your informative reply. The big elephant in the room is always future governments; they can always change the rules like make dividend income the same as interest income, and say it’s to “help the poor”. I would not be surprised to see some sort of RSP ‘surtax’ to fund some new government program, like “DVD-rewinders for the poor”.
Check out my website and you’ll see where I am coming from….
Correct, who knows what governments will or won’t legislate. I will check out your site. Cheers!
Happy to reply! Yeah, governments tend to change their minds…even after they get elected on the platform we voted them in on…. *sigh*.
Even as someone who has a dividend growth portfolio, it is really only one piece of a greater financial picture. While I think simply buying an ETF for dividend stocks really doesn’t give you that much material diversification over you basket of 30 or so holdings, it can give you peace of mind which is worth far more. Good luck with it! I hope it turns out for the best and continues to allow you to grow your dividend income stream.
This where I am coming from, piece of mind. I think a broad market CDN ETF for me can do that. This way, eventually, I’ll have a ‘core and explore’ portfolio whereby most of my money is indexed but still a nice portion is invested in 30+ stocks for income. Thanks for your comment.
Very interesting – that’s a great return and a huge step in the right direction. Have you ever posted about which stocks you’re invested in? Sounds like you have a great investing mentor.
I have from time to time Daisy, but because I disclose a great deal of my personal life here, I don’t want to share too much and thus don’t provide details about individual holdings. I provide some hints what I own in various posts and also on this page, my investing strategy. It’s rather simple actually but I’m learning simple over time, works very, very well.
Another issue is that these ETF have at time capital gain distributions on which you have to pay tax and which decrease the effective yield.CDZ had such distributions for the last 3 years,XDV for the last 2 years.
True Roger, but some CDN ETFs only pay cash distributions (i.e., like dividends) so I only have to worry about capital gains upon sale of the ETF in a non-registered account. I will likely put the CDN ETF into my TFSA, then I have no capital gains to worry about anyhow. 🙂
The issue with ETF’s is that you pay an annual fee just for holding the stocks you would have likely selected yourself anyways.
Even a 0.10% fee is $1000 if your portfolio value is $1 million. If I had $1 million, you can buy positions in 40 individual stocks, and pay less than $200 in total in commissions JUST ONCE.
Yes and no. I can’t get the diversification of VTI by only holding 40 US stocks.
In Canada, I could get most of my diversification from 40 stocks, which is why I don’t intend to sell any of the stocks I own. I might buy just one broad-market Canadian indexed ETF for my portfolio, but that’s it. I consider it a hedge against my current list of stocks because nobody knows the future of any companies. That ETF costs less than 0.20% and I own over 200 stocks with 3% yield. A pretty good deal I think.