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 focusing on dividend paying stocks and how reinvesting the dividends paid from the Canadian companies we own are helping us reach financial freedom.
For this month’s update, I thought I would do something a bit different. I’m going to outline what I’d do if I was just starting out…on my dividend investing journey.
Like I mentioned in previous dividend income updates, although I’m a fan of low-cost Exchange Traded Funds (ETFs) to diversify my portfolio more going forward, I continue to hold and reinvest dividends paid from dozens of blue-chip Canadian companies in our non-registered accounts and Tax Free Savings Accounts (TFSAs). I do this because I’m after this passive income stream for retirement (and my RRSP is maxed out for 2015).
Just starting out…
If I had a few thousand dollars to start my dividend investing journey today, I’d probably buy what I did 5+ years ago: a company like Enbridge. Maybe this is hindsight bias…it probably is. This is a dividend king that has paid dividends for a couple of generations now and has worked out for me very well to date. There are other dividend studs in Canada and my goal is to own all of them. Beyond Enbridge, I’d probably advise a younger self to give consideration to owning a dividend ETF such as VDY, ZDV or XDV. This way, again just starting out, I could reap the diversification benefits these ETFs without the risk of going “all in” with one stock. I need to remind you at this point….only you can determine what your tolerance for investing risk is. This is something I’ve figured out for myself over the years, which leads me to my next point.
What to be mindful of…
Just because a company pays a steady or growing dividend, doesn’t mean it’s always going to be that way. I’ve certainly make some stock selection mistakes and this one comes to mind. It’s absolutely impossible to predict the financial future but needless to say, some companies simply aren’t worth the higher-yield risk. I would advise my younger self, when it comes to dividend stocks, focus on dividend growth over dividend yield. I’m glad I made this financial mistake. Better to make a few small investing mistakes than make big ones later in life. We don’t learn in life unless we fall down every now and then.
Yes, Fortis, Telus, BCE and many Canadian bank stocks are darlings to dividend investors. That’s not very much diversification though. If I had a few thousand dollars to start my dividend investing journey today I’d give some consideration to owing more U.S. stocks, sooner. The Canadian market does not have many multinational consumer companies – so I’d be inclined to start investing in U.S. dividend aristocrats like Johnson and Johnson, Procter and Gamble, Coca Cola and other stocks earlier in my investing career. If in doubt about U.S. stocks to select I would advise my younger self to invest in a low-cost ETF like Vanguard’s VTI and never stop doing so. This ETF costs about 0.05% MER and owns thousands of U.S. stocks, so owning VTI in large quantities reduces any risks that come with individual U.S. stock selection.
Our ultimate goal is to create a mini-Canadian index: use the sector breakdown of the TSX Composite Index and own roughly 35% financials, 20% energy 12% materials and some industrials and telecommunications companies in the Canadian portfolio. This portfolio is almost fully constructed.
As of this month, we’re projected to earn almost $11,400 this calendar year from Canadian stocks that reward shareholders every month and quarter. I’m optimistic we can hit our long-term goal in another 10-12 years. This will occur if we can continue to max out our TFSAs every year, invest in our non-registered accounts after the mortgage is done and simply let the stocks do their work. This makes time in the market our friend. Let’s see where we end up.
Thanks for reading and supporting my journey.
What have you learned about investing in dividend paying stocks for passive income?