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…
I happen to agree with you on all points. It seems that in recent weeks a lot of our fellow dividend bloggers have changed their opinions regarding their dividend portfolios and have been selling part of or totally liquidating their dividend portfolios. I can say that when a crash occurs I’ll simply stay the course. I already went through 2008/09 and saw my entire portfolio deep in the red only to keep investing every month through those dark times. If it happens again I am very confident that I won’t be selling anything. Thanks for sharing.
I will do my best to stay the course DivHut. Easier said than done when it seems like the sky is falling. Thanks for reading and sharing.
DivHut: ” I can say that when a crash occurs I’ll simply stay the course.” Super advice and for those in the accumulation phase, buy more of your quality holdings!
Maybe I got lucky from the start I don’t know. I sure didn’t feel lucky after I started out with DGI in June 2008 just before the big crash. Whether you measure success by total return against the indexes or being able to increase dividend income I did very well as a rookie and thereafter. My performance during the great recession outperformed the indexes and five dividend cuts in 8 years never once decreased my annual income stream. I would have to underperform for a long period of time to reverse my long term lead over the indexes.
If one is starting out I also would suggest an easy strategy like indexing. DGI is more hands on to start and should be studied in more detail before venturing out. I wouldn’t suggest dividend ETFs either as they can’t be relied upon for decent dividend growth through thick and thin. Once an index investor has over $5K and they want to stay easy peasy with very good odds of outperforming the market I highly recommend Mawer Funds. A good one to start is Mawer Balanced Fund. This one has outperformed the equivalent globally diversified index 14 out of the past 16 years and overall by an average of 2.6% annually. Several other Mawer Funds have handily outperformed over the long term.
Robb’s point about a good market over the last 8 years “lifting all boats” is largely true….not sure if that is luck or not….but I also felt rather nervous after the 2008 crash. I’ve learned over time that established companies that have paid dividends for 100+ years will likely keep paying them. (CDN banks). Even companies that have paid them for 40+ years will likely keep paying them.
I wouldn’t suggest some dividend ETFs because there are some high-yield stocks in there and those ones you don’t want to own long-term since dividends are likely to be cut. I want sustainable dividends over time – that’s what I’m looking for. Basically, most of the companies in XIU and a dozen REITs. That’s a great CDN portfolio right there in my book. Sprinkle in a few household names from the States and there’s your portfolio.
Mawer does have some great products. I wouldn’t hesitate to recommend their balanced fund for an all-in-one product to anyone.
Bernie, Mawer Funds have not outperformed their risk adjusted index as discussed here. http://www.canadianportfoliomanagerblog.com/active-funds-exposed/. Active managers will often do this – choose a lower risk index and claim they have outperformed. Not so when measured against the appropriate risk adjusted index.
I believe in real performance numbers. Check the “real” returns in Morningstar (price + distributions) post fees.
“Risk adjusted” performances are published by those biased towards index investing. All of the links you have provided are from pro-index sites, many of which sell index advisory services. I’m not saying the info provided is incorrect, it’s just creatively tilted to enhance their arguments, risk tolerance and investment philosophy.
True Indexers aren’t supposed to care what their returns are. They just want to get market returns with as little of their input as possible. I hope you realize your post will serve to generate another scripted reply from Grant. He’ll likely reiterate that one should not only hold the Canadian index but a globally diversified portfolio of equity indexes and fixed income. I see nothing wrong with his or other indexers choices, I’ve always stated this. I’ve just grown very tired of their “preaching” most of it coming from Grant.
Grant, just tell us we’re doing well with our focused strategy instead of saying “not that there’s anything wrong with it”. It sounds like something you’d hear on Seinfeld.
Bernie: Your correct and I probably press the point as much as he does. I don’t believe that 98% of investors lose money or don’t match market returns. Certainly most beginners fail and make the common mistakes we all did, but over time and experience there are many ways to beat or match the market than just with Indexing and DG is just one. Mark uses both and others may have their own strategy that has worked.
I would say most beginners fail for sure but from what I know of you, Bernie and Cannew, and other investors who visit this site – I bet you don’t make the same mistakes twice. And you’re not beginners any more!
True Indexers also don’t care about what price they enter the market with – because the best price is today’s price – the market price.
Grant is a smart guy. Indexing is working for him and many others. I think it’s a great strategy. I advocate others to invest this way if they don’t have the time, inclination to learn about investing in other methods, and are focused on long-term growth. I just happen to like buying and holding some companies and paying no fees in the process.
I still don’t get the obsession with Market Returns, which is really the change from one year to the next, not an on-going change. Look at the yearly returns of the TSX 60 Index since 1999
The market started at 375.98 in 1999 and ended 2015 at 764.54 or a 20.45% increase and averaged 3.34% over the 17 years. Sure 17 years is not a long period, but my dividends alone have done much better than the index over that period.
Market returns are great if you don’t want to take on extra risk or more risk than you need to take on. Personally, I think owning, at least in Canada, many blue-chip companies will deliver superior returns. I hope I’m right long-term 🙂
“Matt, index investors get market returns, less the cost of the ETFs”
It’s pretty simple Grant – you are attributing the human condition to DGI investors but not ETF investors.
In other words, most Index investors WILL NOT get market returns less the cost of their ETF’s
Matt, obviously behaviour plays an important role in passive investing, as it does in any investing strategy, including yours. So what is your point? I’m not sure why you would think I have not thought through my point of view?!
Cannew, Ha Ha! I agree with you on that one!
Bernie, it’s easy to confuse average returns and market returns. 98% of investors are not below average, they get below market returns. Index investors, by definition, get market returns (minus the cost of the ETFs), which is much more than the average investor gets. 2% of investors get above market returns, which is certainly more than the average investor gets, and of course, there is no way of knowing what percentage of money invested in the market they have, but would most likely be much less than 50%.
“you need to go with the investing strategy you are most comfortable with so you will stay the course”
That is a given and was stated by others on here before Grant entered the debate. It appears several of the commenters are comfortable with DIY-DGI. I certainly hope the other commenters, indexers included, are comfortable with their investment strategies.
Good discussion, and I think the key takeaway on the debate of dividend investing vs indexing was mentioned by Grant above: “regardless of the evidence indicating the optimal outcome, you need to go with the investing strategy you are most comfortable with so you will stay the course”
Dan: Provided one:
– avoids excessive trading
– avoids New Issues
– avoids cyclicals (though some have been lucky)
– avoid tips
– avoids hot stocks
etc, etc, etc.
That was an excellent point by Grant. Agreed. Good to hear from you Dan. I will email you back this week!
Cannew, the point is that if you pick stocks by dividends, you are leaving out all the stocks that do not pay dividends, many of which will have significant exposure to the size and value factor, factors that are predictive of returns, whereas dividends are not (although dividend stocks do have some exposure to the value factor). A total market index fund captures all the stocks (the market factor). If you want to overweight small cap and/or value you can do so by owning small cap/value ETFs, somewhat difficult in the Canadian market due to lack of product, but easy in US and international markets.
The Fama French research showed that small cap stocks outperform large cap stocks, and value stocks outperform growth stocks. If you screen stocks by dividends, you leaving out many small cap and value stocks.
Grant: “the point is that if you pick stocks by dividends, you are leaving out all the stocks that do not pay dividends, many of which will have significant exposure to the size and value factor, factors that are predictive of returns, whereas dividends are not (although dividend stocks do have some exposure to the value factor). A total market index fund captures all the stocks (the market factor).”
That’s where differ. I’ve found that by sticking with dividend stocks, especially those with a history of increasing them, I’ve avoided being one of the 98% losers. You believe the only way to be a winner (and I assume your the 2%) is with Indexing and that’s ok, just don’t lump everyone else as part of the 98%.
Great post Mark, and an even greater discussion!! The dividend investing vs indexing debate has been going on for decades.
I bought my first mutual fund 27 years ago, then moved to index funds, then ETFs. I’m now 100% in dividend paying stocks and have been for the last 17 years, The return of my dividend stock investing has far outpaced my first 10 years as a mutual fund investor. I don’t consider myself an active investor, I’ve owned most of my stocks for more than a decade. Last year I executed one trade. I also don’t do DRIPs but that a topic for another day.
I agree with DGI “Financial advisers love index funds, because they do not have to spend any effort picking good investments, so they can focus their time on gathering client assets. The more assets they can gather, the more fees they can charge. Plus, if their clients lose money, the advisers can blame it all on the index they picked not doing too well.”
Indexing might work for some people. People who don’t have the time, confidence, or desire to select dividend stocks. But I would argue it’s easier to pick dividend stocks than to pick from the multitude of available index funds. If you are going to index be aware of the following 3 things:
1. Index funds inadvertently buy overvalued stocks: On any given day some stocks are undervalued and some are overvalued. When you buy an index fund your money goes to buying both undervalued and overvalued stocks. As a dividend investor in the last 17 years I have only bought undervalued stocks.
2. Index funds inadvertently buy lousy stocks: At any given time some stocks are quality stocks and some are not. When you buy an index fund your money goes to buying all stocks in the index, some of which are quality stocks and some are not. As a dividend investor in the last 17 years I have only bought quality stocks, and defined by my 12 Rules of Simply Investing.
3. You’re still paying fees: Fees are much lower for index funds than managed mutual funds, but a fee is still a fee. Using an online calculator I compared the cost of owning an index fund versus owning individual stocks:
Amount invested: $100,000
Index Fund Fee: 0.83%
Index Fund: TD US Index Fund-e
Total fees paid after 25 years: $28,095.90
Amount invested: $100,000
Trading Fee: $9.99 per trade
Number of stocks held: 20
Total fees paid after 25 years: $199.80
In my opinion an index fund is not the greatest investment strategy, but it works for some people. The same way you could fly from Toronto to Chicago on the Bombardier Q300 or the CRJ700, they’ll both get you there but one is the better option 🙂
Kanwal, index funds also inadvertently buy underpriced stocks and ride them up. Long term investors know that many “over priced” stocks of the past have gone on to much higher prices as their growth in earnings exceeded expectations. Many of these ETFs fees are now around 0.1%.
The data shows that 98% of investors do not beat the market, although due to overconfidence many think they will be able to. This is known as the Lake Wobegin effect, a mythical town where everyone is above average.
“The data shows that 98% of investors do not beat the market, although due to overconfidence many think they will be able to.”
This is bunk as is the statement that everyone is above average! The median will ALWAYS be 50%! If it were 98% the market would be in a permanent downward freefall. Think before you comment!
Bernie, I’m not sure what you don’t understand about the comment. If you look at the data it shows that 98% of investors do not beat the market over the long term. Some do over the short term, but over the long term, which is the only time period that matters, not so. That is not bunk, it’s a fact. You may choose not to believe it, but that doesn’t change the facts.
Clearly the median, by definition, is 50%. I never said it was 98%. I said in in the mythical town of Lake Wobegon everyone is above average – it’s joke that in this mythical town everyone believes they are above average, just as many people believe they can beat the market, when in reality only about 2% actually do.
Of course it’s a joke that EVERYONE is above average in Lake Wobegon unless all the state’s bright minds live there. I also have a very difficult time believing 98% of investors fail to beat the market over the long term. Are you sure that percentage wasn’t created by the same person who thought up the above joke? The median, we both agree on, has to be 50% which is buoyed by an equal amount of money in buys and sells. If 98% of investors are below average the other 2% would have to be above average with over 50% of all invested money in the market.
Show us conclusive proof of your “overwhelming” evidence Grant. It often appears you are pulling numbers out of a hat.
Agreed, that’s what I said with index funds you get BOTH undervalued stocks AND overvalued stocks. The difference is I ONLY buy undervalued stocks. True, overvalued stocks have gone on to higher prices, but the capital gain will be higher for the investor who bought the stock when it was undervalued not overvalued. Also the dividend yield will be higher if the stock was purchased at the undervalued price.
A stock is undervalued when it’s current dividend yield is higher than it’s average (10 yr) dividend yield:
current dividend yield > average dividend yield = undervalued
current dividend yield < average dividend yield = overvalued
I'm not trying to beat the market. My goal is to build a stream of growing passive income (via dividends) each year. Since I started investing in stocks my dividend income has increased consecutively each year for the last 17 years.
There are different methods of determining valuations. Morningstar compares 5 different valuation metrics, including yield, over 5-Yr periods. They are listed under the “Valuation” tab on the website.
Great to see you’re increasing your income every year with your valuation method and happy with the results! I don’t aim to beat “the market” in performance either but I measure it nonetheless. My long term average annual DGR is 8.8%. It’s been accelerating into double digits the last few years from compounding of the reinvested dividends.
Kanwal, 90% of activity in the market is by professional investors – the brightest minds, most powerful computers around, and tons of data. When you buy what you believe to be an undervalued stock, it’s highly likely that the professionals will be in the other side of the trade, and they won’t sell it to you unless they feel it is an overvalued stock. Do you think you know more than them?
If your goal is to build a stream of growing passive income, that’s perfectly fine, but many like to use the optimal strategy that will give you the highest probability of amassing the largest pool of capital so you can retire earlier, spend more in retirement or leave a larger legacy, or maybe even all 3.
Grant:” 90% of activity in the market is by professional investors – the brightest minds, most powerful computers around, and tons of data.”
Too bad their objectives are not the same as ours. Their goal is to earn their company or themselves the most money they can, from the individuals who invest with them. Ours is to earn as much as we can without losing our investment.
Professional investors have very short time frames. Honestly.
An investors greatest weapon is time in the market.
You should know this as an investor.
Even if it’s true that 98% of investors don’t beat the market – that includes etf & Index investors, so I am unsure of your point with regards to Dividend Growth Investors..
Matt, index investors get market returns, less the cost of the ETFs. The data shows that only 2% of active investors – that’s anyone that buys individual stocks, including DGI investors, beat the market over the long term, the long term being defined as 20 years or more.
Grant, you are making a gigantic assumption that all ETF investors don’t sell at inopportune times! We all know that is not the case. This is a huge fallacy for someone approaching this argument from the academic side! Even if an ETF has a 10% return, the investors who are in and out of it don’t.
Pick any investment product you want, people are still going to make poor decisions.
Invest with ETFs all you want, I don’t care but don’t tell me I am being irrational by beating your returns when you haven’t even thought through you point of view.
Grant: ” Dividends do not appear in the list of factors that drive returns, although they do give you some exposure to the value factor. Therefore, whenever you focus on dividends, you turn away from the drivers of return, which is the key reason that dividend focused investing falls short.”
I find it interesting that John Bogle feels otherwise:
Cannew, Jack Bogle is talking about the components of return – yield, earnings growth and speculative return. Dividends have accounted for, I think, about 40% of total return over the long term. This is different from the drivers of return, or factors that provide explanatory power, which for equities are beta, size and value and for bonds are term and credit.
Grant: So what do drives provide that components don’t tell one as far as potential future return? Bogle seems convinced that his simple formula has matched market returns (with minor variation) since 1900. I agree with his assessment but measure my return with dividend yield + dividend growth (which comes from growing earnings). The valuation portion only affects the market value of my holdings.
Dan and Mark, I agree that as behaviour is the most important factor in a successful outcome, you should choose the strategy that you are most comfortable with and therefore you are most likely to stick with for the long term.
However, I think before you start, you ought to look at the evidence to see which strategy has the highest probability of the optimal outcome, behaviour aside, and then go from there.
When I started a few years back, I didn’t know a thing. I hardly knew the difference between a stock and a bond, so my mind was a clean slate. When I looked at the evidence, it soon became clear to me that passive index had that highest probability of the optimal outcome. Here’s the thing. In the equity market the drivers of return are market (beta) which is simply owning stocks, size (small caps beat large cap), value (value beats growth) and a few others. Dividends do not appear in the list of factors that drive returns, although they do give you some exposure to the value factor. Therefore, whenever you focus on dividends, you turn away from the drivers of return, which is the key reason that dividend focused investing falls short. You also have a less diversified portfolio which will give you a wider dispersion of returns without a higher expected return. Passive indexing focuses on these drivers of return and gives you a much more diversified portfolio than one that focuses on dividends, and therefore will give you the highest probability of the optimal outcome. And in retirement, cash flow can be managed using a total return approach just as easily as one focusing on dividends
It’s unfortunate that in these discussions, rather than sticking to the facts, ad hominem attacks often rear their ugly heads. Comments such as “cult leader Larry Swedroe”, “the man has made a lot of money selling funds to the common investor” and “financial advisors love index funds because they don’t have to spend anytime picking investments” tell you more about the person making the comment than the person on the receiving end of the comment.
Not withstanding all the evidence, a dividend focused strategy is a very good one and will get most people where they want to go. And if receiving a cash dividend every quarter (bird in the hand etc.) can help a person avoid behavioural errors, especially the “big mistake” of panic selling in a crash, then dividend investing is the best strategy for that person. In other words, regardless of the evidence indicating the optimal outcome, you need to go with the investing strategy you are most comfortable with so you will stay the course.
Larry has left a few comments on my site over the years, and instead of saying, like you Grant – stick to the strategy that is realizing your goals, as long as you understand those risks – it’s more like, your strategy is largely doomed against indexing.
“Any individual who is not professionally occupied in the financial services industry (and even most of those who are) and who in any way attempts to actively manage an investment portfolio is probably suffering from overconfidence. That is, anyone who has confidence enough in his or her abilities and knowledge to invest in a particular stock or bond (or actively managed mutual fund or real estate investment trust or limited partnership) is most likely fooling himself. In fact, most such people—probably you—have no business at all trying to pick investments, except as sport. Such people—again, probably you—should probably divide their money among several index funds and turn off CNBC. —Gary Belsky and Thomas Gilovich, Why Smart People Make Big Money Mistakes”
I don’t think I suffer from overconfidence. Rather, I have confidence that companies that have paid dividends will continue to pay them just like people who index have confidence that the overall market will continue to inch forward over time for capital gains.
Your points, I find Grant, are rather balanced – and yes – a cash dividend every quarter (bird in the hand etc.) does help me avoid behavioural errors, especially the “big mistake” of panic selling in a crash. This is why I believe I have chosen the correct strategy for me. A hybrid approach. I appreciate your comments.
Mark, good post. I love dividends but also see the value in indexing. As Robb mentioned earlier investors should find a strategy that works best for them and stick to it. I think most who pick a rational strategy that suits them (div investing or indexing) and sticks with it long term will do fine. For some that is indexing, for others that is dividend investing. Nothing wrong with either strategy, they’re just different. Which strategy results in a higher return is a never ending debate and has tons of variables, some of which relate to the investor themselves. If buying individual stocks keeps you up at night (despite the expectation of dividends) and could cause you to make irrational decisions (such as constantly selling based on emotion) then perhaps indexing is a better strategy
The debate will never end. 🙂 Buying individual stocks does not keep me up at night – as long as I own about 40 of them, ideally all DRIPping dividends at some point. I figure if I own most of the stocks individually, in XIU, it’s hard to go wrong. Outside Canada it’s a different story. I index much more for the U.S. Good to hear from you!
Good stuff. Ditto on the “draw down” order and rationale.
I hear you on inflation factor. I figure our early CPP plus OAS @65 and pension in today’s $ is 70K give or take a couple of hundred. I don’t know your pension or CPP but my guess is your projection may be low – OAS@13692, CPP 15000??, pension??
Hard to say. I know CPP and OAS get raised with CPI over time. CPP is once per year. I believe OAS can be increased up to 4 times per year. I would have to confirm that…
$70k per year in retirement is a nice sweet spot, below any clawbacks. I assume that’s for both of you? After taxes, that’s likely $5k per month. Very nice.
Yes, It will be nice but we’ve got some years before that happens. To confirm it’s my wife’s pension, estimated early CPP for both, OAS for both all in today’s $$. To me OAS is a wildcard though as who knows whether it will be sustainable or whether clawback levels will be lower in order to preserve it for some. It’s also hard to say on taxes as we have investment cash flow to consider too, and it’s impossible to project ~8 years out on tax rates! Although it will certainly be a fair bit more tax than what you’re suggesting.
Yes, you’re right about CPP & OAS currently.
Yes, very hard to say about OAS – sustainable for not. As always, time will tell!
Good to know I was right about CPP and OAS, at least for now 🙂
Good post and a worthwhile discussion Mark.
From what I have gathered from reading you and Robb it seems to me you’re both making wise choices based on your goals and investing styles. Perhaps a key difference is simply you are planning to build a larger pot in order to not tap capital (at least delay for years) whereas I understand Robb plans to generate cash flow from capital also over time. In any case anyone investing in equity index funds is going to receive dividends, although more likely they will yield less than with the dividend focused stock investor. Some mention dividend growth investing but I don’t know that this is your particular strategy, although no doubt many of your holdings do qualify.
I agree generally with what you’ve said in your post but would add that it assumes a person is in an all equity portfolio and therefore some of it does not apply, or is different for someone also holding fixed income investments and/or using a cash wedge approach etc.in retirement. I have been on both sides of this and am now indexing mainly for simplicity and increased diversity. I like dividends as much as anyone but they represents part of our cash flow strategy, albeit an increasingly important one. In this low rate environment, and with forecasted future lower economic growth dividends have/will become a more important consideration for equity investors and balanced investors. Prices generally seem to support this now.
It is certainly possible to build a great dividend income portfolio, but I would humbly caution those who believe over a lifetime they will generate a superior total return to the market index. While possible the odds may be against you, assuming very low indexing costs.
Perhaps you explained it best here Mark:
“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.”
This is a wise approach.
I appreciate the detailed comment.
I believe, rightly or wrongly, cash flow from your investments is a great concept/goal/objective. Outside of my pension, I figure we’ll need $1 M to retire on – that portfolio should yield about $40k per year in dividends. If I don’t need to touch that capital, that’s a good hedge against any inflation risk and a host of other investing risks.
I could be wrong but I feel dividends will be very important in the future – rather – the ability to live off your investment income and not just rely on your capital – will be very important in the future.
This is where the mindset comes in – you’ve keenly read that 😉
You’ll be there and more. Yes, not “needing” the capital is an excellent hedge and $40k is a great “income”, especially when many of the dividends are growing nicely.
So far 2.5 yrs in retirement we’re spending slightly less than the net (after tax) “income” generated by our investments and 1 pension. We’re also paying more in taxes now than we could by drawing down registered investments in order to smooth future income. Perhaps we have a similar mindset, but are achieving it in a little different way. Although I need to adjust our asset allocation carefully in time to better ensure this can continue.
I’m following your plan closely 🙂 I believe we’ll draw down assets prior to accepting any CPP and/or OAS payments. We’ll kill the RRSP before the non-reg. account and the non-reg. account before the TFSA.
The way it stands now, with CPPx2 and OASx2 and my pension alone – we should be able to earn about $40k in retirement in today’s dollars at age 65. That’s good but not enough to fight inflation nor lead the life we want. Hence, another few hundred bucks is going into the RRSP on October 1. 🙂
Christina: ” i think the size of your portfolio may dictate whether you do dividend investing. Based on the size of my portfolio i don’t think my portfolio would generate enough dividends to make it worthwhile to do it.”
Probably the reverse, a person with a fairly large portfolio, may feel it simpler to hold a few etf’s and get total diversification for a low fee and possibly with less work.
But those with a small portfolio and limited funds to invest may be better off investing to generate income, especially if time is on their side. Example: My wife set up a one stock DRIP for the grandkids but has made no additional contributions since 2011. Their quarterly income in 2011 was $72.06 now $147.99 and the value of the stock up 26.8%.
It will be interesting to see if my holdings change over time. I hold about 40 CDN stocks. I know you feel diversification is somewhat overrated but I feel good about my banks, pipelines, utilities, telcos, lifecos, and a few energy companies. I can only see profits from those studs long term.
Christina: ” What dividend investors are trying to do is in a sense create a an income stream like a pension for themselves whereas if you are like me and have a pension that income stream becomes less important”
Yes, one is attempting to generate and income stream, a growing income. But just as important, if your income is growing, without further injection of funds, than more than likely so are the value of the stocks one owns. Take a look at the long term chart for iShares S&P/TSX 60 Index Fund https://www.google.ca/finance?q=TSE%3AXIU&ei=72nuV6mYOdezjAHBlI_oBA
The price of XIU is about the same as it was in 2008 before the financial crisis. Compare XIU’s chart to some of the dividend stocks Mark has listed most will show growth from 2008.
Exactly my point about unbundling the ETF – XIU in particular. I sure know my dividend income has grown a great deal since 2008! This is a good thing 🙂
One last comment. I believe the difference (though i’m not a 100% sure) is Rob has a pension and Mark doesn’t. What dividend investors are trying to do is in a sense create a an income stream like a pension for themselves whereas if you are like me and have a pension that income stream becomes less important.
I do have a pension, although not as good as Robb’s (I don’t think). I’m actually investing like I don’t have any workplace pension – I know I need income to live from after work – and I’m trying to do that within another 10 years. Thanks for the comments.
I don’t think it has been mentioned but i think the size of your portfolio may dictate whether you do dividend investing. Based on the size of my portfolio i don’t think my portfolio would generate enough dividends to make it worthwhile to do it. Plus i would have a riskier portfolio because i wouldn’t want to hold a lot of stocks due to brokerage fees so i would only hold a few stocks.
Potentially Christina, and fair comment. But I did start dividend investing about 8 years ago with only a small portion of my portfolio. For example, my initial investment in Enbridge was $500.
The key in my opinion for Canadian stocks, is to buy blue-chip stocks, companies that have paid dividends for generations, otherwise index invest. Both approaches are great but I prefer no fees where I can.
Hey Mark, good counter-post. This dichotomy between indexing and dividend investing reminds me a lot of a post I wrote comparing debt pay down strategies: the debt avalanche versus the debt snowball. With the avalanche method, you tackle your highest interest rate debt first, while the snowball method tackles the lowest balance first.
Anyone who does the math can plainly see that they’ll pay less interest and be out of debt sooner with the avalanche approach. But some argue that the snowball method “feels better” because of the psychological advantage of paying off a low balance quickly. A quick series of wins helps motivate you to keep going.
Indexing is all about the overwhelming academic evidence that investors would be better off buying the entire market for a small fee. Dividend investors might say that this sounds great in theory, but in practice it feels better to receive regular cash dividends rather than ‘hope’ that markets will continue to grow as they have in the past. Dividends also help investors weather the storm during a market crash (provided the dividends don’t get cut or eliminated).
Maybe it’s all about the illusion of control. Your active management “feels better” because you’re exercising control over when and what to buy and sell, whereas an indexer seems to have given up control and left his or her investing fate to the stock market gods.
But is your judgement really adding value and leading to a positive outcome? In my case I felt it wasn’t. Even though my portfolio beat its benchmark for five years, I chalked that up to timing – a rising tide lifts all ships and when you start dividend investing in 2009 like I did you’re going to have some pretty stellar returns.
Why can’t you be happy enough with Index investing being better for you instead of having to insinuate that those who stay the course on the DGI approach are not rational?
I can tell you that me beating your total returns year after year is not irrational.
I agree with Matt! I have done very well performance-wise since I decided to go with DGI in June 2008. I really don’t like to brag about my performance but feel the need to state my case because of the constant criticism from the index cult. As for annualized total returns, my 2/3 Cdn stock/1/3 US stock DGI portfolio is 1.2% ahead of SPY, 7.2% ahead of XIU.TO and 2.2% ahead of BRK for the 2008-07-31 to 2016-07-31 period. The time frame covered a myriad of market conditions. I’m up 15.5% YTD.
I don’t mean to be disrespectful to indexers in calling them a cult but most seem to be reading from a script with their condescending comments to DIY investors. Why can’t they just be happy with their choice instead of telling others that they are irrational or that their outperformance can’t possibly continue over the long term.
Thanks Bernie – I suspect because it’s at least partially because the cult leader Larry Swedroe is exactly that way. He is a big ‘efficient markets’ proponent and is condescending as hell.
Be happy with your investment style and profit. I hope we all profit and do well. I use Indexing for my kids RESP accounts for goodness sakes but this kind of talking is ludicrous and off putting.
Yes, I’m well aware of Mr Swedroe. The man has made a lot of money selling funds and financial books to the common investor. He chooses to call dividends irrelevant. Whatever…lol. His views are of little relevance to me and my investing approach.
Good to see you’re comfortable your investing style and performance Matt! Also nice to connect with you, I wish you well!
Larry is quite passionate about indexing for sure. That’s great. It doesn’t mean every other investing approach is wrong or incorrect. They might have certain risks. Those risks need to be understood and accepted.
Financial advisers love index funds, because they do not have to spend any effort picking good investments, so they can focus their time on gathering client assets. The more assets they can gather, the more fees they can charge. Plus, if their clients lose money, the advisers can blame it all on the index they picked not doing too well.
To justify their fees, many of these advisers engage in “asset class picking”. So in essence, they pick 15 different index funds. The end result is that they pick some random funds, whereas before they would have picked 15 – 20 individual stocks. Just ask any indexer why they selected the indexes they selected, and the answer is always ” because I felt like it”.
Ironically, index investors who pay steep fees to expensive advisers will underperform the index. There are some shops out there that charge you 1% – 2% per year for the privilege of selecting a few index funds for you.
Financial advisers do not like dividend investing because most dividend investors are DIY. These DIY investors know that advisers bring no value, which is probably why advisers see us as a threat. In general, this has led to double standards against dividend investing. I am hopeful it continues, because the less interested dividend investors, the better opportunities for people like me.
This is what I struggle with as well….with some investors….clearly they feel if you’re not an indexer your approach is all wrong. The condescending comments annoy me as well but I just smile. If I’m meeting my goals, that’s what matters, I don’t really care about yours 😉 You should feel the same about my approach – it’s not for everyone and I get that. That’s OK by me – that’s my I am My Own Advisor 🙂
The analogy of debt paydown is valid I think – both strategies work as long as you have the discipline to execute.
While math is important, there is the risk perspective as well. Would you rather be debt-free and no retirement portfolio or in debt with some retirement savings? Clearly the math says debt-free is better – right?
Indexing recall is about active money management using funds and portfolio managers. Indexing rarely compares the investor who buys and holds stocks; with little to no investment fees over time. It will be interesting to see in another few decades, if I what I write today is true – can I “live off dividends” to some degree because a) I’ve saved but b) I’ve also invested in a manner than does not rely on selling assets to give me the income I need.
Thanks for the comment Robb, always good to discuss approaches.
Funny you mention illusion of control as a reason against dividend investing.
The only thing you can control as an investor is how much you save and what you invest in.
In previous interactions, you have actually talked against increasing savings rates. Ironically, this is the only thing you can control – you do not know if your index fund selections will do better or worse than my investment selections.
I think the real reason why you switched to indexing is because you do not save enough, and you think that index funds would magically cover your shortfall because you have read somewhere that indexing is always better ( it is not, especially if you pick the wrong index). Plus, you have unrealistic expectations of withdrawal rates of 6%. I realized you have no idea what you are talking about, when I read your article where you talked about how you will retire at age 45. The problem was that your own calculations didn’t support your own assumptions.
The only person who believes in magic is you… But indexing is no magic.. The reason it “wins” is because of lower cost than a higher cost fund. That’s it.
“The reason it “wins” is because of lower cost than a higher cost fund.”
I would revise this sentence to “the reason it “wins” is because of lower cost than a higher cost fund of similar holdings.”
Fair comment and would agree!
Good article Mark!
There are good and bad points with all styles of investing. One should go with the style that most closely resembles their risk tolerance and that they’re most comfortable with. I’ve always felt DGI is misunderstood. For one thing, not all DGIs are the same or follow the same path or strategies as they differ with goals, risk tolerances, investing time frames, etc.
Perhaps it comes with the territory but I’ve always found it naïve of index followers to state “there is no difference between a cash dividend and the sale of an equal amount of stock”. Yes the $ amount at the time of transaction is the same but the similarity stops there. After the transaction: (1) the stock seller holds less stock and is at the mercy of the stock market for future sells, whereas (2) the dividend investor continues on with the same amount of stock, briefly lower in value, but with the same dividend that is predicted to continue to grow in $ size.
There is nothing wrong with index investing, I say to each their own…I just prefer more hands on with less volatility coupled with more predictability of my cash flow.
I also feel DGI is somewhat misunderstood. It is possible to hold enough stocks, at least in Canada I feel, that hug the index nicely without paying any ongoing money management fees.
I think indexing is great. I use indexed products myself and always will. I just don’t like the “index or nothing else matters” rhetoric.
This is a nice article. I generally like your balanced view of using funds and individual stocks ( which is something I am increasingly doing as well).
I posted the following comment on Robb’s site:
Who thinks that dividends are magic? I am interested in learning, because otherwise, the first point is a straw man argument.
The second comment does not make a lot of sense – a lot of growth companies pay and raise dividends. Capital allocation at the business is what should be studied.
On third – indexing does not automatically make you a rational investor. If you study the results of index fund investors as a group, you see them underperforming the indexes they track. You can have things like performance chasing with indexes as well.
On fourth – it depends. Let’s say that you bought 1000 shares of Nortel at $50/share, and sold them for 60 cents, you got $600. If you bought 100 shares of Altria for $15, and they now happen to generate $600 in dividend income every single quarter. You have $600 in hand in each scenario. But you would have to be a fool to select option one.
Here’s a few comments:
The amount and timing of dividends is more predictable than capital gains.
This makes dividends a helpful tool to live off in retirement. But the total returns of a diversified dividend portfolio (at least a diversified US one) should be relatively similar to that of US index portfolio. I know Canada is less diversified as a whole, so foreign stock ownership is encouragable.
Imagine a situation where stocks never pay dividends. The price is determined by other people, who get greedy and fearful. So your returns are dependent on the opinions of others. What if the stock market investments go flat for extended periods of time and investors have to “sell shares” at depressed values. The problem is not regret – the problem is eating your capital in retirement and running out of money.
When stock markets have been booming for a while, everyone is looking for total returns. When I started in 2007 – 2009, everyone was embracing the idea of dividends as cash in the hand. What does that speak for investor behavior? And if everyone is embracing indexing, isn’t that an example of herding ( a behavior problem)?
Thanks for your comments DGI – great to hear from you.
I also agree that dividends can be a helpful tool to live off of…eventually. A solid, DGI portfolio, shouldn’t lag or necessarily trump the index over time. I do hold some indexed funds for my international exposure. It’s just not realistic to own 8,000 stocks.
I worry long-term about eating into capital too early or making the wrong transaction at the wrong time. With a dividend-focused strategy, I feel I have less to worry about – psychological benefits aside.
Diversification is one of the hardest thing to overcome. Everyone stresses its importance and the reasons to diversification make sense. I don’t want to argue against it, but I found that over the long term its not as big a deal as its made out to be. The major crashes and surges affect all stocks and the differences seem to be in the short term. So if one is buying and selling than it may make a difference, but for those who hold for the long term and investing for income, a more selective portfolio will do as good if not better than being diversified. I agree that growth is important but a company cannot increase its dividend over the long term unless its earning grow, which in turn grows its price.
Exactly Cannew! You can’t raise your dividend if earnings aren’t going up long term.
I have been managing my own for almost 4 years now and have handily beat all relevant benchmarks by investing in large cap, blue chip companies. Investing is simple, not easy. There is a difference.
Well done Matt. What stocks do you own? Canadian only or a mixture of CDN and US stocks or other stocks?
Both Canadian and American, although I haven’t been doing much American investing since the CDN dollar sunk. When it goes back up I will invest the majority in US stocks I imagine.
Same. I’ve been doing a bit, but not much.
With the Canadian market an oligopoly, I don’t think diversification is as much of an issue if you’re-CDN only focused…but I do believe to some extent – CDN-only focused is not ideal because you are missing out on the returns of the other 96% of the equity markets around the world. There is no guarantee as Canada goes, so goes the world markets but I believe there is a decent correlation between the CDN market returns long-term and US market returns long-term; given they are our largest trading partner and likely always will be.
Thanks for the comments cannew.
This seems to be a case of whatever works for any individual. I like seeing the dividends and dividend raises on the individual stocks I own but I can see the attraction to ETFs.
I can see the attraction to ETFs as well, but not all ETFs are indexed products. Actually, there are only a few dozen amongst the hundreds and hundreds of ETFs that are really the broad-market kind you want to own – otherwise, I think many ETFs are the “new” mutual funds in disguise.
I agree Mark. Well said.
I remember his stock selections and I think for him index investing is the best choice.
He had a habit of reaching for yield that burned him more than a couple of times.
Sticking with blue chip, stable companies is the key.
Also – it needs to be said that these companies have growth as well. It’s not either/or.
Fair points Matt. I think indexing works great for those that don’t have the time, inclination or care to watch how they invest. It also helps investors avoid many behaviourial biases including trading. I honestly feel a diverse basket of blue-chip stocks is not unlike indexing: both strategies think and act long-term, you strive to keep your investing costs low and you don’t trade. That’s 80% of investing success right there!
Hey Matt, actually my bad stock picking habit wasn’t reaching for yield but rather straying outside of the blue-chippers (there aren’t that many in Canada, after all) and buying smaller cap stocks such as Rocky Mountain Dealerships. I didn’t have the patience to sit on cash if all of the blue-chips were over-valued. I wanted to put that cash to work.
Great post Mark. While I do index a portion of my investment portfolio, I’ve always felt that income investing offers my family a bit more financial security in case, as you mention, you need money now or in the near future (versus decades down the road). When a portfolio generates 20-30k/year it’s like having a whole other paycheque. The increase in cash-flow gives people a lot of financial flexibility that they otherwise might not have.
I have the same security blanket. I have a high-level of confidence that for the rest of my life, or as long as I want, I will earn at least $13,000 per year from my portfolio and never run out of money. That’s a nice, although small, part-time job for life I never have to work for…
I’m curious. Which Vanguard ETF’s do you invest in?
VTI for US market.