A few weeks ago Robb Engen of Boomer & Echo fame wrote this article: why my thinking changed around dividend investing.
It was a balanced argument in favour of indexing via his two-fund ETF solution – owning Vanguard ETFs VCN (Canadian stocks) and VXC (U.S. and International stocks). Here’s why my thinking about dividend investing has not changed:
- While dividends are not magical they are rather good
I believe dividends are part of total return, there is nothing special about them – except they will pay for a good portion of my expenses in semi-retirement. I am optimistic those times will be younger than most in my generation – before age 55. I will be relying on dividends from part of my portfolio to cover some basic living expenses without touching the capital: home operational expenses (heat, hydro, water); home property taxes; home insurance and more. I could of course rely on selling part of my portfolio and use that money to pay for expenses – but then I’m fighting longevity and other risks. That brings me to point #2.
- Income investing works
In his article, Robb mentioned “as a 37-year-old investor with an investing time horizon in the decades, it’s not a priority to generate dividend income from my retirement portfolio. I should be looking to maximize growth in the most diversified and efficient way possible.”
Growth is great to focus on but what if you need income sooner than “decades”? Unless you can predict the future, growth might be grand or minuscule. Nobody knows what the future holds. This is why I have a bias to dividends now and the hope of capital gains in the future.
I’ll put it this way….
Would you prefer to get your paycheque from work every two weeks in a predictable manner or would you prefer the promise of a paycheque for the same work performed in another year or so? I know what I prefer.
Before you jump all over me – let me say investing for growth is important. I do this as well, via a couple of U.S. listed Vanguard ETFs (I own different ones than what Robb owns). Just don’t completely dismiss the income approach. It can work very well with a basket of dividend paying stocks across various market sectors or by owning a few income-oriented ETFs.
- Mind the mirror regardless of your investing approach
While there is no difference between a cash dividend versus the sale of an equal amount of stock – indexing might test your nerves more than dividend investing. How comfortable are you going to feel when the next market crash comes, and it will, and you watch the equity portion of your portfolio drop 10% or 20% or 30%?
Will you be able to stay the course?
Will you feel the need to shift into bonds (as bond prices rise)?
Will you want to sell equities when they are falling lower?
Dividend investors might be able to fight the urge to sell stocks better than indexers because cash will continue to flow in. At the end of the day, rational investing is required with any investing approach.
- Fear of regret and everything in between
Sometimes it’s hard to sell a stock, Robb is correct. You can get attached to your portfolio rather easily. However, the more you invest, the more you learn and one thing I’ve learned about investing is this – investing needs to be objective to the point of being emotionless – like a zombie.
Whether you sell a stock or sell an ETF that holds a basket of stocks, you can’t regret anything. Get a plan, pick your products for the plan, and stay the course. The transaction to buy (or sell) should always be based on logic, facts and your investing goals. I sold this stock and I don’t regret that decision although at the time I felt foolish for owning the stock in the first place. The benefit of selling that stock was I was able to crystallize some capital losses to offset some capital gains. So, the downside of selling had some upside from a tax perspective.
Our goal is to “live off dividends” but that’s more of a mindset to help us shape our saving and investing behaviour rather than something that’s actually doable to the tune of $50,000 per year. You can read more about some planned “retirement” expenses here.
Personally, I think most Canadians would be rockin’ with an equity portfolio churning out thousands of dollars per year income; income to spend as they please without touching the capital. Dividends are not magical but they are a very important part of your portfolio’s total return. Although low-cost indexed ETFs are excellent products for investors there is much more to successful investing than owning a few good financial products. Financial planning is personal and the process of planning is important because plans change and in the end nobody can predict your financial future.
At the end of the day, choose the investing approach (or approaches) that help you realize your goals.
What do you make of my investing approach? Are you an indexer 100%? Do you prefer ETFs over any individual stock selection? Comment away…