September 2023 Dividend Income Update
Welcome to a new dividend income update!
As many readers know, we have a hybrid investing / two-pronged approach to investing, an investing path we’ve taken for about 15 years now:
- We invest in Canadian and U.S. dividend paying stocks – that focus on income.
- We invest in low-cost equity ETFs – that deliver a bias of long-term growth.
You can read more about what we own and why when it comes to individual stocks on this page here.
We do not invest in fads like covered call ETFs, as an example. Our return with low-cost ETFs vs. covered calls is the blue-line below vs. the covered call red-line. Your mileage may vary.
Beyond stocks and equity ETFs, this is a good time to remind you that we always keep some cash on hand to buy more stocks (and equity ETFs) when the market tanks.
In the coming months, we might get a better chance of that…new TFSA contribution room is opening up in less than 10 weeks!
Overall, when we do invest in any individual stocks, we prefer stocks with:
- An established dividend history.
- Growing company earnings per share.
- Companies that have a moaty competitive advantage.
September 2023 Dividend Income Update
For this month’s update, I figured I would answer a few reader questions. I love getting them and I enjoy answering them. Keep them coming folks!
Mark, I watched your TD webinar recently, I really enjoyed that. I wonder why other investors are not focused on total return? Thoughts?
I don’t know.
First off, I must say, I still love my dividend stocks in Canada in particular. To say dividends don’t matter at all to me would be a foolish statement. I like income from my/our portfolio and years ago I decided to unbundle any Canadian ETF for income.
In doing so, my returns meet or exceed the TSX index. I can also meet or exceed the returns of the TSX at times since I don’t have a money manager to pay. Again, your mileage may vary…
Dividends matter to me like capital gains matter, like share buybacks matter, like good companies paying down debt matter, like company growth matters too.
To be fair, many Canadian DIY investors (not just me!) have focused on investing in dividend paying and dividend growth stocks for years. Some DIY investors have been widely success at it. In fact, a few select DIY investors I’ve been in touch with over years now earn well over $100,000 per year from their portfolio, and growing, thanks to their dividend income. So, dividends can really, really, really matter…
Dividends are a great way to fill up your bank account. I don’t deny that. Beyond registered income, many DIY investors also have some tax-efficient income to report to CRA too, if we own Canadian dividend paying stocks in a taxable account. (We do.)
Yet I am not a dividend or nothing investor.
Again, I fully admit I’ve always had a bias to getting paid instead of creating my own dividends, especially when it comes to Canadian stocks.
There are other successful DIY investors I know that enjoy creating their own dividends from timely stock sales and/or ETF sales – since they follow a total return approach.
In contrast to traditional income-oriented strategies, like dividend investing, the total return approach generates income from capital gains in addition to portfolio yield. When combined with a prudent spending rule, a total return investing strategy could have several advantages compared with the income approach:
- Portfolio diversification. Total return strategies tend to be much more diversfied across asset classes. As such, they may hold up better during stock market shocks.
- Tax efficiency. Investors with a total return approach may pay less in taxes because part of their payment comes from capital gains, which are taxed at a lower rate than income.
- More control over the timing of portfolio withdrawals. With a total return strategy, investors may have more peace of mind because they can spend from capital gains in addition to portfolio yield.
The danger in an income-only approach is potentially a lack of diversification I referenced in the recent TD webinar with my other webinar panelists. I just personally don’t believe that owning only Canadian banks, utilities and pipelines are a good, diversified portfolio. Nice starters for sure. I’ve always invested beyond those sectors myself.
An alternative to any all-dividends approach is to consider total return, including a mix of bonds (as you wish) but more importantly investing in a range of industries and geographies.
“The punchline in a total return approach is you get returns from potentially three key income sources: interest, dividends, and capital gains – not just one.”
I will close this thought by saying that while income and yield from stocks is great, dividends unto themselves ignores other investment choices that could yield (pun intended) greater wealth-building results.
Mark, with inflation sustained, are you still considering semi-retirement in the coming year or so?
Life is short, time is precious.
To be very clear, I don’t want to retire and never work again. That makes little sense to me and how I’m wired.
In semi-retirement, I/we simply want to work more on our own terms.
It is my sincere hope I can work part-time with my current employer, in a similar role (?), and continue my tenure there but time will tell if that works out. A decision needs to be made in a few months. I’ll keep ya posted…
Mark, are you worried about dividend cuts? Something like AQN could happen again with these higher yields, right?
But I’m also very optimistic that while Canadian utilties, pipelines, telco and bank stocks in particular have been hit hard this year, not every company is going to cut their dividend and certainly a collection of companies like this is not going to overturn their dividend policies all at once.
More importantly, total return matters.
So, worse case for the income only crowd, some companies cut a dividend, investor sentiment and expectations change, and such Canadian moaty stocks focus on capital gains instead vs. any sort of clear dividend policy.
Globe and Mail columnist John Heinzl recently answered a reader question (subscribers) related to this theme, on the subject of Enbridge’s juicy dividend yield. John suggests not to lose any sleep over Enbridge:
“Enbridge’s growing earnings, in turn, should support future dividend increases, while preserving the company’s investment-grade credit ratings and keeping its dividend payout ratio within its target range of 60 per cent to 70 per cent of distributable cash flow per share, the company said. (Enbridge defines DCF as operating cash flow, minus preferred share dividends, maintenance capital expenditures and other unusual and non-operating items.)”
“Still, investors should temper their expectations for dividend growth. Until a few years ago, Enbridge was hiking its payout at double-digit percentage rates annually, but future raises will likely be in the low single digits. Mr. Catellier projects that the annual dividend will increase by 3.1 per cent to $3.66 for 2024, which is in line with the 3.2-per-cent raise that Enbridge announced last November.”
Dividends are a way to fill up any bank account. Capital gains work tremendously well too.
September 2023 Dividend Income Update
Well, time for our Projected Annual Dividend Income (PADI) update:
Image, with thanks: Pexels, Daniel Jurin.
- That income is averaging just over $117 per day.
- A reminder this is income from our taxable accounts (x2) and RRSPs (x2) – income we expect to earn this year assuming no dividends get cut and/or no additional dividend increases occur and/or I/we don’t buy anything else for the rest of the year. 🙂 Honestly, I probably can’t afford to buy anything this year since we’re saving up for January 2024 TFSA contribution room right now….
- Another reminder we don’t include any TFSAs (x2) in this tally since we won’t be touching those assets for potentially another 20-25 years.
Established readers will also remember we do a few things to support this income inching higher each month:
- We remain invested. I suggest you do the same. This way, you’ll get more dividend increases if and when they occur.
- We invest new cash when we have it.
- We try and avoid selling stocks where possible even if a dividend cut occurs to avoid tinkering with the portfolio, although I did sell off some AQN earlier this year but I retained some as well.
September 2023 portfolio changes
As I wrap this post, keen readers will notice that our income this month is quite a bit higher in just one month!
Well, we received dividend increases from Fortis (FTS) and Emera (EMA) in September that pushed our projected income higher without lifting a finger.
Between now and the end of 2023, I also expect small dividend increases from TD Bank (TD) and the aforementioned Enbridge (ENB). We might also see some special dividends from some Canadian oil and gas stocks too…
Thanks very much for reading and I welcome any comments or questions you might have!