Welcome to my latest dividend income update for 2016. For those of you new to these posts on my site, every month I discuss my approach to investing using Canadian dividend paying stocks and Exchange Traded Funds (ETFs), and how reinvesting the dividends and distributions paid from these Canadian holdings are helping us reach financial freedom.
Dividends are good but let’s be clear: dividends can disappoint.
It’s true.
Even though my thinking about dividend investing has not changed for many years, it’s not all roses. Dividends can be cut or eliminated. Look at Dream REIT (D.UN) this year. Hopefully that’s rare for your portfolio.
With this risk provided let’s also revisit why corporations have paid dividends. It’s not as straightforward as you might think.
In a perfect world, all businesses would allocate capital in a way to perfectly maximize the return on that capital. This would be done so reinvested money would go back into the business in way that pays off immensely for the shareholder (by increasing returns over time AND by continually reducing the company’s tax burden). As you know, we don’t live in a perfect world.
This means shareholders have over time demanded a dividend – for the purposes of “optionality”.
The link I provided above tells us shareholders like optionality – and dividends provide that optionality – to give them the choice to increase or decrease their exposure to the business. Reinvested dividends therefore, take advantage of that optionality, to increase exposure. Dividends taken as cash, do not. The former is something I do, often, although there are never any long-term guarantees about the success of any business. This is why regardless of what you do with your dividends you must diversify across companies and sectors and countries if you want to hold individual stocks. Otherwise just learn to live with stocks for a low fee via index investing and be the market; owning good and bad stocks and everything in between.
In September, the following companies we own increased their dividend (and those dividends were reinvested):
- Fortis increased their dividend by 6.7% to $0.40 per share.
- Verizon increased their dividend by 2.21% to $0.5775 per share.
Thanks to the Canadian companies we own in particular, that pay dividends, we crossed a new milestone this month. We’re on pace to earn just over $13,000 in dividend income this calendar year – money we don’t dare touch because it’s earmarked for our financial future to pay for expenses when we’re not working someday.
Getting paid and getting some raises from time to time for doing nothing but staying invested – is part of the optionality equation shareholders have demanded as part of our modern economy. Dividend investing provides cold hard cash into our bank account that we will eventually use. Dividends are not magic, dividend investing is not without some risk, but they are good.
Mark,
$13,000 in dividend income? Nice work! In combination with your future Defined DB pension, you’re going to be a pretty darn wealthy retiree. In fact, your dividend income might eventually exceed your pension payouts. Keep it up! I love it!!
Andrew
Great to hear from you Andrew! 🙂 Yes, just over $13k per year in dividend income, excluding our RRSP assets and workplace pensions. We’ll keep saving and see where we get in a few years. Thanks for the motivation. Mark
Thanks for this tips. I will try to buy up some good Divs Stocks and ETFs too. Do you have any current good recommendations on which stocks and ETFs are good to look into buying to maximize our dividends? 🙂
Thanks for your question Yen. Not recommendations per se since I cannot do that on this site for many reasons however I have provided a list of my favourite ETFs and what I use and why:
https://www.myownadvisor.ca/etfs/
The more I keep thinking about, the more I come the conclusion that to succeed with stocks you need the following “ingredients”
1) Ability to buy and hold stocks for the long run ( dividends stocks or funds)
2) Ability to keep adding money through the ups and downs
3) Ability to do 1) and 2) patiently over long periods of time ( staying the course)
There will always be bumps on the road, but they are all lessons to learn from.
Btw $13,000/year is pretty sweet.
I totally agree with the first three. I hope we can cross $14k early next year.
Mark: In August you were projecting $11,300, now in September its $13,000. Whether it from additional investment or growth what’s important is you can see your income grow without caring if the Market value is up or down. Good Work!
Both. Some new investments because we saved, some dividend increases (and likely more on the way: Telus), and reinvested dividends. We just stick with our boring plan – save, invest, reinvest dividends; rinse and repeat each month. Thanks cannew.
Well, sounds like you had a freaking amazing month of September. Important lesson in there that dividends aren’t guaranteed. Remember when all of us KMI shareholders were boasting about their always increasing dividend…just to see the house of cards come crashing down?There is always risk to investing, but we all try our best to keep that risk to a minimum by investing in stocks with a proven, long term track record. Stepping off my soap box now!
Bert
Correct, dividends are by no means guaranteed just like capital gains are not. However, over time, if one invests in a diverse basket of companies you are mitigating investing risk – which is always a good thing – just in case dividends from any one company are cut or worse case, eliminated.
13,000 is nothing to sneeze at looks like you are doing good
Coming along. Thanks Doug. Our big hairy audacious goal is $30k, so we’re getting there.
Ditto here but a couple of positions with them through an ETF. Cut- likely yes.
Good post. Congrats on the new milestone.
Dream probably isn’t a big surprise to many. And yes, dividends are good especially when they’re sustainable and rising.
Thanks very much. I still have some small assets with Dream. Not good since it’s now a high-yielder; another cut to come I think.
For sure. Rising dividends are very good.