Why I don’t invest in Canadian Dividend ETFs
Fans of this site, including many long-time readers and investors who enjoy this site, continue to tout the benefits of low-cost investing to others…but I still don’t invest in any Canadian Dividend ETFs.
That’s because when it comes to investing I believe you often get what you don’t pay for.
One way to reduce your investment fees, is to own lower-cost dividend ETFs.
In fact, here are some of the great benefits that come from investing in dividend ETFs beyond just ETF distribution income:
- Transparency – within a few taps of my phone I can see what every single holding is in these funds. I can also read up on the fund’s prospectus to learn how fund turnover is managed and how often. Portfolio turnover within the fund costs money – someone needs to get paid! That brings me to my next point below.
- Modest fees – you might recall, active fund management costs more because money managers are paid to perform. A pay for performance mandate encourages the mutual fund money manager to buy and sell stocks frequently in an attempt to beat the market or the index they are tracking. Fund management, buying and selling, incurs time and resources. Time is money. Those costs are passed on to you. Instead of this model, I think investors should strive to invest in a low-cost ETF that follows a reputable, established, broad market index such as the S&P/TSX Composite Total Return Index or for dividend investors in Canada, an established dividend-oriented index such as:
- S&P/TSX 60 Index (my favourite – see low-cost ETF from iShares XIU), or
- S&P/TSX Composite High Dividend Index, or
- FTSE Canada High Dividend Yield Index.
- Lower effort – if you’re going to invest in some individual stocks, you need to spend some time understanding these companies and understanding what you own, why you own it. I read a few annual reports every year and follow metrics like yield, payout ratio, earnings per share, cash flow to name a few. Dividend ETFs don’t have this complexity – they bundle all these companies together for you.
There are certainly many benefits to owning Canadian dividend ETFs…but I still don’t invest in any of these Canadian funds.
Read on in this updated post…
Why I don’t invest in Canadian Dividend ETFs
Here are my reasons why:
1. I built my own Canadian Dividend ETF.
Many years ago, I learned there is merit to owning the same Canadian stocks the big funds own – so I started that process. I’ve never looked back.
Here is one quick example – look at this RBC Canadian Dividend Fund in 2011:
And now the same fund’s top fund holdings as of April 2017:
And what does the RBC Canadian Dividend Fund own in 2023?
Lots of differences eh? (Images courtesy of RBC’s site.)
Source: https://www.rbcgam.com/en/ca/products/mutual-funds/RBF266/detail
Let’s look at another example and pick on one of my favourite ETFs: XIU.
Now, again, if you don’t want to buy and hold certain stocks, nor try and create your own Canadian Dividend ETF like I have, then no problem. This fund is arguably one of the best ETFs to own in Canada.
(I recall iShares XIU was one of the world’s first ETFs.)
XIU holds the largest of the largest Canadian companies. My perspective is, if collectively the largest 60 companies in Canada aren’t making money year-over-year, nobody is.
This ETF has provided strong Canadian market returns over the last decade and remains a great choice for your indexed portfolio should you decide to go that route.
Here are the top holdings from XIU, from April 2017:
And as of April 2019:
And what does low-cost XIU in 2023?
Images courtesy of BlackRock’s site.
Humm, not too many changes. Something to consider…
2. I control the portfolio turnover (which is largely non-existent)!
I can count on my hands how many stocks I’ve bought then sold over the last 15 years. Yes, full disclosure, I have sold a few stocks over the years. I believe that comes with the DIY investor territory.
However, for the most part, instead of buying and selling any stocks including Beat the TSX stocks, I buy and hold and reinvest dividends for higher income over time.
You can see how that (boring) approach is working out for me below.
This was my December 2018 update focusing on taxable accounts and our TFSAs:
This was my May 2023 dividend income update:
3. I save on fees.
As a consequence of buying and holding, I don’t pay any money management fees except for a few $9 or so transactions, a few times per year.
4. I am able to participate in dividend increases over time.
Money that makes money, can make more money – if you leave it alone.
“The first rule of compounding: Never interrupt it unnecessarily.” – Charlie Munger
While XIU has been a solid performer, and likely will continue to be, you can see from the information below it certainly doesn’t increase your passive income as much as some of the holdings within XIU have in the past.
Take Royal Bank stock in particular, image from Royal Bank’s site from 2018:
Updated again for 2023:
For Royal Bank (RY) stock, you’ll notice dividend payments to shareholders historically double every 8-10 years.
Why I don’t invest in Canadian Dividend ETFs summary
By creating my own Canadian dividend ETF per se, for almost 15 years now, I own what many of the big funds in Canada own and pay no ongoing money management fees to do so.
While this is my preferred approach to invest in Canada low-cost ETFs for any market are more than fine too.
You can check out some of my favourite ETFs on this page here:
What do you make of my decisions to invest this way?
Do you feel lower-cost, broader-market ETFs are the better way to go?
Let me know what you think in a comment! I read every one.
Mark
Mark
My name is Mark Seed - the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, I'm looking to start semi-retirement soon, sooner than most. Find out how, what I did, and what you can learn to tailor your own financial independence path. Join the newsletter read by thousands each day, always FREE.
Hi Mark: Ronaldo this may not be a spreadsheet but it works for me. When dad passed I was left with the job of straightening out his book for the accountant. It was a pain as he would mark it down as he bought it so I had to go through the whole book and gradually add up the stocks. I or someone else would never do that again so I got my neighbor to make me a chart of capital gains and losses like is in the CRA tax work book. Now if I buy a new company I just add a new row and mark down the year bought, name, # of shares, and cost. I don’t need the weighted value as it will all work out in the end. Mark if you are buying x ETF’s than they are probably I shares. Did you know they were started by a Canadian. Som Seif to be more exact. He turned around and later sold the company to Blackrock. As I say I find the market educational
Yes, I know Som. Had the pleasure to meet him a couple of times. The firm was Claymore investments.
The market is educational indeed!
Mark
Uncontrolled Capital Gains; my wife’s non registered account holding ETF XDIV and XEI generated a whole bunch of capital gains via churn in their portfolio….we sold nothing yet there they were on her T3. Got to pay the tax.
Interesting details. Yes, XEI and others might not be as tax-efficient as XIU. I read a Globe & Mail article on that too 🙂
https://www.theglobeandmail.com/investing/markets/inside-the-market/article-rob-carrick-why-dividend-growth-investors-may-want-to-pass-on-etfs/
Mark
A little confused. I thought I was reading a new post. But sounds like a re-hashed topic. And then we get to the comments and they are a couple years old. What is this????????????????
Sorry, I was busy travelling of late and didn’t clean up some of the comments.
Didn’t mean to confuse you.
What do you make of my continued reasoning? I know we invest in similar stocks/Canadian stocks I recall for similar reasons. Happpy to learn you take.
Cheers Div,
Mark
People are asking questions about best approach. I think you try to give them every approach as you mention your favorite ETF’s etc. (why are they your favorites when you don’t believe in investing in them?) For a beginner the best approach in Canada is the BTSX. (dividendstrategy.ca) Individual stocks that pay dividends. This has performed better than any other method over the last 30 years. Sure, you hear from some that picked an Apple, Google, Amazon, or something like that. But how have they done over the long term?
ETFs are fine if you really feel you need to diversify outside of Canada. But for beginners in this country it is better to stay with this simple strategy. The confusing part comes from advocating every strategy.
Look at the markets this week. I just had a record dividend haul for June, and still have one more to come. Keep it simple and enjoy life.
Thanks Div.
The reality is, I personally feel, there is no best approach.
If folks want to invest in dividend ETFs, great. If they’d rather own XIU in Canada, awesome as well.
I also believe a great approach is starting with BTSX stocks and building your own DIY portfolio from there. “Best” is relative. It is very hard to argue with the BTSX approach but following that approach strictly assumes you rebalance the portfolio every year. I don’t know of any investor that does that in practice – which is fine of course.
“ETFs are fine if you really feel you need to diversify outside of Canada.”
Totally. Always felt that way. Small DIY books say the same thing.
https://www.myownadvisor.ca/benefits-of-the-6-pack-portfolio-review-and-giveaway/
At the end of the day, stocks, real estate, growing a business, etc. have a plan and try to stick to it.
Like you, I like my basket of CDN stocks and some ETFs to keep life simple. And enjoy it too.
Thanks for your thoughtful comment.
Mark
“there is no best approach.”
+1
Have a great weekend, Lloyd! :))
Mark
Mark i still do not see the list of stocks that u own. Also how u r weigting them – did u finally select one of the 3 or so etf’s and just pick up all of the top 10-14 shares and in relative proportion to what the weights the etf’s hold ? How many individual stocks do u own – after years of investing i am owning too many stocks and the bookkeeping is getting to be very much a drag. Can u also reco a good spreadsheet just to keep track of each system of investing style’s return. thks loads enjoy ur openness.
Thanks for your comment.
I share lots of personal details on the site. Most of my holdings are here:
https://www.myownadvisor.ca/dividends/
I agree, the bookkeeping can be a headache so there is value in a few low-cost ETFs to simplify.
Thoughts?
Mark
Hey Mark, another great article, thank you very much.
Would you happen to know why the dividends from individual holdings increase much more than the ETF with the same holdings (ie: your RBC vs XIU example)? I see someone mentioned above, this could be a mute point given that individual holdings (ie, RBC) are more expensive per share, whereas buying into the ETF you have a lower share price, and therefore your making smaller distribution yield on each share, but you own much more, which in theory could even out the total earnings?
Am I making sense here, and does this reasoning add up? In the end, I just don’t want to choose a Canadian dividend ETF if it’s going to make much less than buying the same holdings as individual dividend stocks, so any clarification here is really appreciated.
Thank you for your generous info and advice thus far!
Jake 🙂
Great question Jake. Essentially, common stocks can raise or decrease dividends at will. ETFs/funds don’t quite have that luxury since assets are pooled and are managed by various fund rules and the money manager. Given ETFs are a collection of stocks or bonds or assets in general, you are therefore subject to the collective gains or losses of that pool. Not so with individual stocks – with more individual risk and that can mean more individual reward.
Buying an individual stock allows you to make a focused investment in a company or business. In contrast, most ETFs may help reduce risk and give investors a way to diversify with less money as well as gain exposure to sectors, regions, and broader markets more easily.
Risk and rewards are related.
Personally, I started out investing in low-cost ETFs like XIU for many years. I felt it was better for me initially. I have since done this:
https://www.myownadvisor.ca/have-you-considered-unbundling-your-canadian-etf-for-income/
Pros and cons of course to all investing decisions!
I hope that helps a bit 🙂
Mark
Thanks Mark! I just was startled by the seemingly huge difference in dividend returns, (XIU’s: 0.14-0.17 approx., vs RBC’s: 0.67-0.98). Am I reading this right?
More importantly, is this above dividend discrepancy lessened by the fact that in a ETF you have a greater amount of lower distributing shares? (vs. a lesser amount of higher distributing individual dividend stocks).
In sum, why I am leaning towards dividend ETFs vs individual stocks, is because I simply want to track the best dividend stocks, and not hold faltering companies, which if I’m correct, I would hold less ideal companies if I picked individual dividend stocks on my own, (given I don’t have the resources/time/motivation to be checking performance regularly enough).
Butttt, if the performance difference is as drastic as you have mentioned (ie RBC vs XIU), then maybe I should commit more time to research and consider individual stocks. That is of course if amounts of shares isn’t a balancing effect as I wondered above.
Sorry if I’m misunderstanding your response, I’m not as term-savvy and experienced as many on these blogs and forums. Hopefully I am being clear as well.
I really appreciate you generously taking the time to respond and help me, thank you!
Jake 🙂
There is absolutely nothing wrong with investing in dividend ETFs, as long as, they are mostly diversified funds, costs stay low (MERs and you don’t trade), and you have a plan to invest in other countries and companies around the world.
You will find if you look at RY, BMO, FTS, EMA, CNR, and other individual companies, they tend to increase their dividends every year, almost regardless of the stock price. Not so true for XIU because not all dividend paying stocks nor companies are created equal. So, you can’t expect XIU to increase their dividend the same as RY (RBC) because RY is just one stock, XIU is a collection of 60. XIU also has portfolio turnover to manage, fees, and other factors at play.
The idea can you find “the best dividend stocks, and not hold faltering companies” is nearly impossible to predict long term. Good companies today could be terrible ones in the next 20 years. The point I’m making though is through a buy and hold of a collection of stocks as a DIY investor puts some odd in your favour that you will pick some winners (maybe), you will hold onto some decent performing stocks as well, and you will only have a few losers to contend with.
If all of that seems too risky, too much work, other – then simply consider VCN, XIU, ZCN and a few-other low-cost Canadian ETFs for your CDN side of your portfolio and be done with it 🙂
Further reading 🙂
https://www.myownadvisor.ca/top-dividend-etfs/
https://www.myownadvisor.ca/top-canadian-dividend/
https://www.myownadvisor.ca/etfs/
Enjoy!
Good article Mark. I wonder if similar copy / paste approach would be a good idea by copying some top/famous US based Div etfs.
Interestingly, a friend of mine just posted about that!
https://cutthecrapinvesting.com/2020/01/05/what-happens-when-you-buy-stocks-without-looking/
I think you can definitely “skim” the top stocks in U.S. dividend funds but since the pool/market is much larger it might be harder to match or beat the index. Therefore, index investing is a great way to go…
Mark
I own some dividend ETFs for Canadian utilities and international markets in my TFSA which I hold with Questrade. What I love about investing in ETFs with Questrade is that it’s free to buy. So I can gradually increase my ETF holdings without paying 5$ fees each time. I only pay 5$ when I sell, which tends to be 100% in one shot when I need liquidity.
Questrade has a great platform Mathieu and kudos to you for buying and holding – and avoiding selling for fees and other bad reasons!
Mark – are you concerned about buying and holding so many Canadian bank stocks, considering the super high valuation of Canadian homes and high personal indebtedness of Canadians? Have you considered downsize risk going forward? (This is why I avoid US dividend paying bank stocks and dividend ETFs that hold a high percentage of banks in them).
I do avoid U.S. dividend paying bank stocks in my portfolio directly Tom – great question. I’ve gravitated to owning U.S. ETFs more over time, although I do hold a number of U.S. stocks directly (ABBV, PFE, JNJ, PG and a few others).
In Canada, yes, it is a concern but unless they stop increasing their dividends let alone stop paying them, I will continue to own CDN bank stocks around 30-40% of my total portfolio.
Time will always tell if that’s the right strategy but I wouldn’t be surprised if all big-6 bank stocks don’t increase their dividends between now and May 2020 – regardless of what the market does.
I think it’s your money and you can do whatever you want with it. I don’t believe investing is a popularity contest. Dividend investing, ETFs, GICs, etc.
Entertaining to read some comments on your blog. Not sure if they are trying to convince others or themselves.
Either way, whatever helps one stay the course is fine.
Agreed Emily, re: there are many roads to Rome. All the best with your investing plans too.
My wife and I have two TFSAs. In each there very good dividend paying stocks, each on DRIP and a D series mutual fund. In bank discount brokers, as RBC, fractional shares are not dealt with; so when new shares are automatically bought, we move leftover cash into a mutual fund.
Seems very smart Ron re: DRIPping your dividend paying stocks. I hope to do the same for many years to come.
I own individual stock and ETFs. I just looked at my cash account and on the Canadian side I have 11 divident payers and 6 ETFs. Probably too many ETFs, but I bought them at different times.
There is, of course, a lot of overlap of holdings amongst them all. But the reason I purchased ETFs when I did, is my indecisiveness….I dither: should I buy it today? Maybe it will be lower tomorrow? Is this the utility I really should get? and on and on…..So it was just easier for me to buy, for example, XUT and I have all the ETFs dripped.
I know that I pay the fee for them, but it is worth it to me. I dither the same way about selling. I began drawing down my RRSP years ago, long before I am required to, and I re-invest the after tax amount in my cash account. So last November I had the dilemma, which stock to sell to get about $28000 out. I don’t have any ETFs in my RRSP, only dividend payers. Of course I could just re-buy the same stock that I sell after I receive the funds (minus 30 percent taken off for tax).
I now am getting $17000 a year in dividends from my cash account, makes me very happy!
I could probably simplify my portfolio as well Barbara. In fact, I know I could! For example, I own VYM and HDV (U.S. dividend ETFs) in different accounts. Why? Why not go with VTI across all accounts? Well, for one, I like the yield from these ETFs that I intend to “live off” to some degree in the next 5 years and secondly, they have a different tilt to sectors that I might benefit from for that desired yield.
Are these the absolutely best products for me to own? Hindsight will tell me but for < 0.08% MER each I think these are good products for income and growth. Both up about 14% YTD. I will continue to own my DIY ETF (~30 CDN stocks) for the foreseeable future. I don't see that changing since the approach is helping me realize my goals. I don't want to fix what really isn't broken!
@Barbara: On your RRSP. We transfer specific stocks In Kind from our RRIF to our TFSA, then the balance of the shares In Kind to the non-registered. Actually we also transfer some shares In Kind to our family TFSA accounts as there are no fees to do so. There is no selling or re-buying of shares.
Smart stuff with the in-kind transfers although folks need to be mindful of any capital gains to be paid when doing so from non-reg. to TFSA. No transaction fees though.
Mark: When transferring from and RRSP or RRIF one is already being taxed on those withdrawals and Capital gains does not come into it as the transfer price would be the same as the withdrawal price.. The In Kind eliminated the fees. If the family accounts are not with the same broker there may be some fees, not sure but taxes are not an issue.
Sorry cannew, I meant you need to consider taxation when making any in-kind withdrawal from a taxable account to a registered account. re: “..folks need to be mindful of any capital gains to be paid when doing so from non-reg. to TFSA. No transaction fees though.”
Thanks Cannew, that is a good idea to split the withdrawal and transfer into two different accounts. I had never thought you could do that.
I did set up a very small RRIF a few years back, when I realized that withdrawals from an RRIF had no fees, whereas withdrawals from an RRSP had a $50 ? (can’t remember) fee each time. So last November I did transfer the stock in kind into the RRIF, then I sold it and withdrew the proceeds. I had a stock where the entire value was pretty much exactly what I wanted to withdraw. But that likely won’t happen again. So in the future, I will transfer from RRSP into my RRIF and then transfer into my cash account. I will do that in 2 steps a bit of time apart, not to confuse them too much.
@May: Nice analogy and not one I’ve heard before!
“Dividends are a guaranteed source of returns. False. Let’s break down the basics of a dividend. Say we have a company with a per-share value of $10. If it pays a per-share dividend of $2, it has now distributed $2 per share to its shareholders; the company has shed $2 of cash for every share on the market. When this happens, the value of each share must also decrease by the amount of the dividend that was paid. As the investor owning these shares, your total return from the dividend is zero per cent. You started with $10 in stock, and you ended with $8 in stock and $2 in cash. You gained nothing”.
I’ve always had difficulty grasping this type of statement. Certainly on the company books the dividends reduce the companies assets (as cash is being paid out), but this has nothing to do with the market price of the stock. The market price changes not because the company paid a dividend but the perception investors have about its effect on the company or whether is happening in the market. Who knows where the stock price will be before or after a dividend is paid, and ones total return isn’t determined till one sells their shares. I don’t count paper changes in value, unless it makes one feel good to calculate it.
Like I explained to my kids, dividend is an egg laid by the chicken. Yes, after laying the egg, the chicken does not have that egg any more, but still a whole chicken, and will be able to lay another chicken after a while. Also, when time goes by, the chicken gained more weight, and will lay an egg even bigger.
If we don’t eat the egg, and let the egg becomes a small chicken, then the small chicken will lay more egg.
So after some time, we will have lots of chickens and we will get lots of eggs. And one day, when mommy and daddy cannot work any more, the eggs will not become small chickens any more but instead, we will live on the eggs.
My kids received this very well. 🙂
That’s a great one to help explain to your children May. Nice to see they’re getting a financial education early in life. Well done.
Now if we could figure out what came first- chicken or egg?
Ha, nice stuff. I want lots of chickens that can make lots of eggs 🙂
I think what Ben refers to is the stock price always falls to the amount the dividend is paid but it’s very difficult to see that given how price movements happen during any trading day let along on the dividend payment date.
I am not sure if I’m correct on this so welcome anyone who knows. However, when recently studying option trading strategies used by people one of the strategies suggested buying stocks just before a dividend was paid, capturing the dividend for yourself and then selling the stock. In order to discourage this practice, a company’s stock goes down in price equal to the dividend so the day trader is no further ahead. I suppose if he holds the shares long enough and the price goes back up he can then sell without losing money and keep the dividend. But I think the idea is that most day traders want to be in and out and hold their accounts in cash at the end of the day. Not sure if this is correct but that was my understanding of the falling share price and an accounting as well as market reason for it.
Sorry a further clarification. Although this was on an options trading website this strategy doesn’t actually involve options but stock (You’d buy the stock, capture the dividend then sell the stock. Since many companies announce their dividend ahead of time and before the date it is actually paid traders could try to capture this money without having any interest in holding the stock long term as an investment. Options traders normally do not own the underlying stock unless they exercise their options and have it transferred/assigned to them.
As always a good balanced look at etfs and stocks while explaining your investing rationale. I share much of your strategy although I add global etfs and a good measure of fixed income assets.
I believe there is no one best investing method or plan that will suit all people. People will have different goals, risk tolerances, knowledge interest levels, and behaviours.
People that educate themselves early on with the different options available including investing costs, and make the appropriate decision for themselves should do well over time in meeting their financial savings/retirement needs.
Very well said: “People that educate themselves early on with the different options available including investing costs, and make the appropriate decision for themselves should do well over time in meeting their financial savings/retirement needs.”
Nothing I could add 🙂 I still owe you an email!
You know where I am!
I tried sending you an investing link a few weeks ago and it bounced back like address was invalid.
Very odd. My gmail? Sorry, I didn’t get it I don’t think. I should check my spam more including your emails.
No the .ca one. I didn’t try the gmail one.
I no longer have it since I did a major email culling since.
Lest one retain the impression that dividend stocks are a no-brainer.
https://www.theglobeandmail.com/investing/personal-finance/gen-y-money/article-a-contrarian-argues-against-building-wealth-and-creating-income/
What he said.
Mr Felix makes some very valid points that are deserving of discussion but one has to keep in mind his business is based on people NOT buying individual stocks.
“…a wealth management firm that builds diversified portfolios for clients using exclusively low-cost index mutual funds and ETFs. PWL Capital does not recommend individual stocks.”
Agreed Lloyd. On that note, I have no issues with Ben’s motivation nor PWL Capital – to grow their book (assets under management). In doing so, I think they firmly believe in low-cost funds as part of a fiduciary responsibility – which is a significantly better model than many other firms out there.
Probably poorly worded on my part. I wasn’t trying to impugn Mr Felix. Good, better, best has many factors that can not be explained in a few short paragraphs in a newspaper. By virtue of the fact the disclaimer was in the article speaks to a high level of integrity and transparency. I also like his videos. I find them thought provoking even if I might have a few very minor disagreements.
I’m on the same page Lloyd. I know Ben follows my blog (as does other PWL Capital folks) and I have high praise for their cause even if I don’t follow an indexed approach they encourage others to consider and help manage.
Good point.
Although I’d humbly suggest they’re not targeting DIY stock investing clients, and charge by assets under management.
I agree with what you’ve said Mark. PWL seems to be a great firm with some smart folks. I’ve learned much from them and benefitted from some of the free tools they have.
That article was a condensed version of the video you linked.
Too funny Jerry. I just read that article and enjoyed it. Ben is one smart guy and I agree with many of his points. Dividend stock investing is not a no-brainer to me but it does help me with the psychological benefit – I see income come in, I see income get reinvested, and I see more income next month. That benefit is huge and I told Ben so. Hopefully we can discuss dividends and investing and more in his podcast at some point.
Thanks for sharing that.
Hey Jerry
I’ve seen the Ben Felix name around quite a bit but never read any of his stuff until this article. I can now say that I’ll never read anything from him again. What a poorly written, self-serving article. They guy doesn’t have a clue.
I looked at a bunch of the comments that other people posted in the article and there sure were some great ones. Lots of great examples of how well dividend income/growth investing has worked in many real life situations (compared to his theoretical garbage).
In particular, I really like sandia2007’s many comments. Very dedicated person to take that much time and put that much effort into clarifying so many good points.
I don’t think dividend stocks are a no brainer but I definitely think they are simpler to select and manage so actually take less brain power, effort, and stress than trying to buy & sell for income.
Ciao
This subject is often a classic example of the old “tastes great” versus “less filling” commercial.
I like the fact that Mark clearly points out some of the merits of ETF investing yet is also clear as to why he does not pursue that method. The case can be made for that approach for some people in some situations. Again, it all comes down to personal situations and how a person wishes to invest. There is no one single way that is the best for every single financial plan. This is why there are now ‘know your client’ rules and regulations. A one size fits all does not actually fit all. I seriously doubt any of us has identical plans or portfolios even though we may have somewhat similar situations.
I have a combination of DG stocks, some growth stocks, some goofy stocks I’m not even sure why I have, some index funds and GICs. I don’t expect everyone to follow the same path I am taking (I’m not even sure it can be called path actually). The “but” here is that everyone should be cognizant of some of the tools available and select an appropriate one for the job they wish to accomplish.
Thanks Lloyd. I try and offer a balanced approach on this site. I mean, if investors wanted to own some dividend ETFs (e.g., XIU + VYM), that would yield them >$30,000 per year from a $1 M portfolio AND grow over time as well.
One size never fits all as you have said and I fully agree with that, even if situations or goals might be similar.
I can’t see myself selling some of my DG stocks nor my low-cost ETFs for some time to come. Sticking with my plan to try and build ourselves a $1 M portfolio in another few years. Wouldn’t THAT be nice if we realized it? 🙂
These are definitely some of the reasons why we don’t own dividend ETFs. Another thing to consider is that you’re paying fees when you hold these ETFs regardless how many shares you own. When we are living off dividend income from our portfolio, we probably won’t be trading much so the “fees” are essentially zero. But that’s not going to be the same for dividend ETFs.
I personally don’t mind paying a small fee now (0.08% MER or less) for my U.S. dividend ETFs. That’s a paltry $80 per year if I had $100,000 invested. Hardly anything to really worry about to own hundreds of dividend paying stocks.
Canada is very different I feel. By owning 20-30 stocks, you’ve largely cornered the dividend investing market.
Mark: I mentioned that if you applied the selection process I described in my book to the US market you could easily come up with a list of quality DG stocks which should provide better returns than ETF’s.
When I applied the process I came up with 26 stocks (others may arrive at a different number) and the 10 year average price growth for the 26 was 255.61%. The average dividend growth for the 26 stocks over the 10 years was 186.60%. One may not buy all 26 stocks but the averages should not vary too much even if one hold less stocks.
I doubt one would arrive at the same growth figures with an ETF.
The growth going forward may not remain the same but, a selection of quality stocks should always out-perform a fund.
I recently sold my investment in XDV and after doing my research, will be investing in companies that pay dividends increasing over time. I read Your Ever Growing Income by Henry Mah (previously mentioned on your site). It gave me the confidence to make this change by offering simple guidelines to consider when picking individual stocks. I will hold onto XIU until the first stage is complete.
Thank you so much for writing such a relevant blog and having such interesting people offer their comments. I am going to reread that book because it has changed my strategy. That book and The Retirement Blueprint helped me pivot from the accumulation phase to the retirement stage.
@Jan: Really appreciate your comments and all the best going forward.
Very fair cannew, re: your selection process. I think, for me, I’m happy to be a hybrid investor for now (some stocks, CDN and U.S.; some low-cost ETFs). I honestly figure this way I can get the best of both worlds – dividend from what I own; reinvest all dividends paid for more income and also some long-term growth!
To clarify, is that 26 stocks for Canada or for the U.S. based on your selection process in Your Ever Growing Income?
I know in your book you cite the following CDN stocks:
-3 banks
-2 utilities
-2 telcos
-a pipeline and also one insurance company
All companies you suggest to buy and hold and hold some more for income.
Mark
Mark: The 26 are the US DG stocks selected from the ETF suggested in the book. I came up with 9 Consumer, 3 financial, 4 healthcare, 7 industrial and 3 material.
As for the Cdn you mention above, they were for those who wish to establish a DRIP and SPP. Not all DRIP allow one to buy additional shares.
For the general Cdn stocks I actually arrived at 22 Cdn DG stocks for my list to consider (5 banks, 2 consumer, 3 pipeline, 1 railway, 2 communication and 2 utility).
Opps! my list was 22 and I further narrowed it to 15.
Ah yes, OK, thanks for clarifying re: 26 for US market and 22 for CDN market. I’m pretty sure I own most of the CDN ones already 🙂
As for the U.S. stocks, I recall you use NOBL ETF to “skim” and I own some of those stocks directly (e.g., ABBV, JNJ, PG, T). I hope to own more healthcare actually in the coming years (via HDV ETF) or directly such as MDT.
Totally correct and agree – the key is to build the portfolio via companies that offer full DRIPs and SPPs. Not all Canadian blue chips do that.
Mark: two of the five US stocks mentioned did not make my cut.
Interesting! Deep screen on your part. I’ll say JNJ definitely made the cut.
JNJ definitely, but there is only three rules used for screening US stocks, not really deep screening.
Hi mark, another interesting insight into your investment thesis.
Oddly enough I follow the same general theme: like you, my early years’ investments consisted primarily of mutual funds until, about 20 years ago, I drilled into the details of these funds and discovered the magnitude of the fees and the type of stocks that were in them. My wife and I set about analyzing the longer term cost of staying with mutual funds and very quickly came to the decision to start divesting of the expensive funds and change to a DIY approach. We’ve never looked back.
Over the ensuing years we eliminated the closet TSX fund and began adding a selection of Cdn banks, telcos, railways, grocery stores and utilities to make up our Canadian holdings. Out of necessity, we still held mutual funds for US and International exposure for several years until we discovered ETF’s. Predictably, about 10 years ago we realized that we had waaay too much Canadian exposure (nearly 60%) and set about ensuring that we trimmed Canadian exposure to a more reasonable level of 25% while improving US and Global exposures to encompass the remaining 75%.
Currently, my Canadian exposure includes almost all of the same stocks that you hold plus a few utilities such as; Fortis and Algonquin Power, a commodity: Nutrien (originally owned as Agrium) and manufacturing in the form of Magna. Our thesis for these selections was to replicate the TSX exposure with what we perceived were the “dividend aristocrats”. It has served us well over the years as we have managed to outperform the Index by about 2% over the past 12 years.
I still recall that the first individual stock added to the portfolio was 500 shares of RY. Today, with reinvested dividends and additional purchases made during the lows of 2008-2009, I’ve got almost 4000 shares with an average ACB of just $26. Nothing gives me more pleasure than checking the current annual dividend against the average cost and finding the rate if return approaching 15%!
My experience certainly reinforces your approach. For most investors, it’s should be relatively easy to create a proxy portfolio that provides a good replication of the TSX index and that the actual number of different stocks required to do so is quite manageable.
Keep up the good work Mark.
Happy Investing!
Thanks for the kind words 🙂
Great comment. I enjoyed reading every word of it!
Ya, I went from CDN mutual funds to CDN stocks and have since realized that all CDN stocks is not ideal so I’ve been trying to buy more U.S. stocks and/or more recently, more low-cost U.S. dividend ETFs like VYM, HDV, etc. That should help reduce my “home bias” over time. Ideally I think I would do well with a 50/50 split of CDN vs. U.S.+International equity assets.
I’m also a big fan of those utilities and own some/I put examples of what I own in Canada on this page here:
https://www.myownadvisor.ca/dividends/
NTR is a good stock I would like to own more of given the nature of our global needs.
WOW: re: 500 RY shares now close to 4,000. “My experience certainly reinforces your approach.”
Great stuff to read 🙂
Mark
Well as a modest worker I sit on far less than $600,000. To buy even one share of TD I have to put $25 apart every month, whereas with XIU I can buy TD and all other large caps right away and make some money. It’s good advice, thanks!
XIU is a great fund Darianne as are many other CDN ETFs like VCN, VCE, XIC, etc.
https://www.myownadvisor.ca/etfs/
Many years ago, I owned XIU for the same reason you and many other investors might – it’s far easier to get diversification this way at a very low cost! Nothing wrong with that and I personally believe this is one of the best ETFs to own in Canada for income and growth over time.
@Darianne: Being able to invest small amounts and buying into a bundle of stocks is certainly an attraction, but you give up both income and price growth. The other point is you will also give up diversification. That’s the trade off. Having said that, I still believe that one is better off by investing in quality DG stocks than an ETF.
Our grandkids have only held one stock since 2007 (they can invest as little as $25 with no fees) and when I compared their income and price growth over the 11 years, they have out-preformed the XIU ETF by over 127%. That amounts to a lot of income and the difference will only grow over time.
Sooo…what stock do they own?
Thanks for the great informative post Mark. I am debating the use of a Canadian dividend ETF vs building my own for the income portion of my portfolio. What are your thoughts on using one of the investing newsletters like the TSI Dividend Advisor to build a dividend portfolio? Thanks.
Dan
Hey Daniel,
First off, I think dividend ETFs can make great sense for investors – but – because I have chosen to own the same top-stocks as the big mutual funds and ETFs own, in Canada at least, I don’t own any. It is definitely not the same paradigm for me with the U.S. market – it is far too big to pick winners so I’m using low-cost U.S. ETFs like VYM and HDV more. You can read about that here:
https://www.myownadvisor.ca/etfs/
As for the newsletter – some are better than others. FWIW, I have a free trial here:
https://research-5iresearch.lpages.co/free-trial-5i-research-my-own-advisor/
There is no obligation whatsoever and you can quit anytime. I have a partnership with these guys because they have conflict-free research which I believe is important.
Again, nothing wrong with a Canadian and U.S. dividend portfolio. I would think investors could do very well long-term by owing a bunch of XIU + VYM, just as an example!
Cheers,
Mark