Let’s face it, when you think of dividend investing, you think of income and not total returns. It’s pretty much where we all start until we discover dividend growth investing and realize you can have your cake and eat it.
My investing journey has taught me that there are two very distinct phases of investing:
- The Accumulation Phase: The years where we save and invest. You let the compounding do the work for years.
- The Retirement Phase: The years where you live from your portfolio. As a dividend investor, that’s the income from my portfolio.
Know Your Portoflio
Before you start applying some of the strategies below, you REALLY need to know your portfolio.
Do you know your exposure across your accounts? If you don’t, get on it and build a spreadsheet. It’s easy, you can build your own pretty quickly. Your exposure has to be calculated for the company like Royal Bank, the sector like the financial sector, and then the industry like ‘banks – diversified’.
Do you know where your income is from? If you don’t, start tracking it. If you don’t know what generates your passive income, then you can’t work on optimizing it.
Do you know your annual income growth rate? If you don’t, you don’t know if your portfolio income is keeping pace with inflation over time. It needs to grow organically. Not all investments have to grow, but overall, your portfolio needs to show it can keep up with inflation.
With a clear view of your portfolio, you can optimize your passive income, sit back, and enjoy financial independence.
The tools below are really meant to help increase your income once you have a portfolio you are happy with.
Modified Dogs of the Dow
This strategy is also known as the Beat the TSX, or BTSX, strategy and consists of automating your portfolio decisions by selecting the 10 highest yielding stock from the TSX 60.
Apply the original rules of the strategy has risks and is not recommended in my opinion. I have added two more criteria to improve the quality of the stocks.
The first is to ensure the holdings have increased their dividends in the past 5 years and the second is to limit the number of picks in the same industry to 2. Otherwise you are loading up on many utilities, banks, telcos and pipelines.
My approach with this strategy is to find the best yielding blue-chip stocks as opposed to apply the strategy as is and add it to my portfolio or swap one with a lower yield.
How To Use The Strategy: This approach is good for a non-registered account. The TSX 60 stocks are the core companies of the Canadian economy which provide safety and the highest yield improves your portfolio income. No selling, just add to existing holdings.
Covered Call ETFs
Want to trade like the pros? Well, they use all the tools in the toolbox such as options trading.
I have often talked about it but I have never done it. After researching covered call ETFs, I prefer to go with a covered call ETF.
You could do it on your own with the banks, but it’s just one extra thing to manage with your portfolio. You need to pick the contract, the expiry and continuously do that. It’s time consuming unliked dividend investing where you buy, sit and cash in the dividends.
The down side of covered call ETFs is that you down know the potential appreciation of the ETF or the growth of the distribution.
How To Use The Strategy: You want to use it to boost your income while avoiding overexposure to some sector or industries. The assumption is that you probably have a lot of banks and utilities in your portfolio so go with healthcare.
There are some specialty investments that can be used to boost your income but they also come with their own risks.
One of the investment options with higher distribution is split corporation such as Dividend 15 Split Corp. It can help increase your income but you have to understand them.
Another option is a specialty fund like Canoe EIT Income Fund. While this is called a fund, it’s more like an income trust and it’s classified as an asset management stock. You invest in the fund manager’s ability to create return on asset which happens to simply be investments just like you and I do.
How To Use The Strategy: You want to decide up front how much you want to allocate to this specialty investments and monitor. While you can increase your income, it’s not a set it and forget it like other investments.