Dividend investing is easy once your know what stocks to look for but making sense of everything thrown at you from everywhere is not so easy!
In fact, many of my learnings go againts what the financial industry tells you to do. Isn’t that counter-intuitive? It’s like you have to unlearn in order to lean again.
You are here to make changes. Don’t wait! Get started and get ready to learn and improve your portfolio.
Most Critical Investing Step
This is not what most people will think about but it will make sense once you think about it.
- Can you imagine driving a car without a fuel gauge?
- Can you imagine a pilot flying an aircraft without instruments?
Investors need their form of instruments too. In fact, we need short term data and long term data with multiple portfolio views to make decisions.
This is an area where nearly all trading platforms fail. If you think you have what you need from your broker, you are probably wrong and missing out.
What is most important to all investors is to have a portfolio view across all of your accounts in one place along with your annual rate of return since inception for your portfolio and your individual accounts.
Unfortunately, data points that are always used and talked about in the media are the last 12 months which is interesting from a news perspective, but it’s pretty innefective for portfolio management. You should not make a decision based on the performance over the last 12 months.
Build your own portfolio view with Google Sheet. This is the most critical step. We all want to buy our first stock but you want to get setup to manage your portfolio from the beginning.
Why is this important? Too many investors invest for a number of years and then they are not satisfied and don’t know what to do. Is my portfolio too diversified? Do I have too many stocks? Which is a good holding and which is not? A portfolio tracker provides you with all the answers!
Know Your Portfolio Performance
Profit is not the same as performance.
If I say I made 300%, what does that mean? In literal term, it means you tripple your investment but what does it tell you? It doesn’t say much more unfortunaly. You don’t know if it’s in one day or 20 years.
The profit or return on investment (ROI) is missing the time component. To truly compare your investments and assess your performance, you want to track an annual rate of return since the beginning.
You can easily get the rate of return for your individual stocks, your accounts, and your portfolio.
Understand your rate of return and how to calculate it. If you know your rate of return is 10% for example, you know you can double your money in 7 years. It’s how you estimate when you can reach your goals.
Choose Your Trading Platform
The cost of a transaction is one factor in your decision to choose a trading platform and then it depends on where you are at in your journey. For example, USD accounts are important to me and it’s an important factor to consider.
If you are getting started, you are probably not tied to any banks which makes Questrade one of the best option as you can buy ETFs for free and buy stocks for as low as $4.95. See Questrade review.
If the fees are not a concern, Qtrade is the best offering out there. Easy to use, better transaction fees than the banks and competitive on features. See Qtrade review.
It’s important that you understand that you can always move your assets elsewhere. All you need to do is fill out the form and move your assets so don’t feel like you only choose once. Feel free to go through all my trading platforms reviews.
Income vs Total Returns
As a dividend investor, you need to understand there is an inverse relationship between income and total returns.
In simple term, the higher the yield, the lower the total return over time. This is why I started using the Chowder Score to find good long term investment. It provides a blend of income and growth combined as a score.
In fact, most dividend investors start with the income angle but that strategy is better for retirement where as dividend growth with a total return angle is better during the accumulation.
Don’t settle for one way to invest all your life. Approach it this way; dividend growth during your accumulation years and income investing in retirement. It’s a simple portfolio switch.
Avoid Country Bias
As a Canadian, we tend to start with the Canadian markets but really the big economy is the US economy.
Luckily, you don’t even need US dollars to profit from the US economy. All you need is to invest in the best S&P 500 ETF. That is not an income play for retirement though.
Let’s be clear, it’s not a dividend stock and it’s not really a dividend investment. It’s a total return investment which has historically done better, much better, than the TSX. Many S&P 500 ETFs trade on the TSX in Canadian dollars.
Categorize Your Holdings
The basic starting point is knowing the sector and industry but that’s really basic. All it tells you is your exposure to an industry and the risk is relative to your understanding of the said industry.
As with most investors, I started with the above but also evolve into tracking a matrix of dividend yield vs dividend growth. The table really helps to view your exposure to the type of holdings you have.
| wdt_ID | Dividend | None | Low Growth (< 6%) | Medium Growth (> 6%) | High Growth (> 10%) | Total |
|---|---|---|---|---|---|---|
| 2 | None | 5.12 | 0.00 | 0.00 | 0.00 | 5.12 |
| 3 | Low Yield (< 2%) | 8.23 | 0.00 | 0.00 | 38.98 | 47.21 |
| 4 | Medium Yield (> 2%) | 0.00 | 1.35 | 9.51 | 10.39 | 21.25 |
| 5 | High Yield (> 4%) | 0.00 | 0.00 | 21.62 | 0.00 | 21.62 |
| 7 | Aggressive Yield (> 6%) | 0.00 | 1.67 | 3.13 | 0.00 | 4.80 |
Another category I like to consider is defensive vs offensive holdings. Don’t mix it with the sector concept but rather focus on the purpose the holding has in your portfolio.
If you follow my dividend income reports, you will notic a lot of analysis on the structure of my holdings. My defensive stocks are not usually the best performing stocks but they provide stability and a fundation for my portfolio. Think of the Canadian banks for example.
Another simple categorization is by market capitalization. For the longest time, I sort of did it mentally but there is an official categorization of market cap and the risk that comes with it.
In the end, you need to tr ack your sector & industry allocation, your market cap categories, your dividend yield and your dividend growth. That’s when you see the full picture.
Understand What Risk Means
Risk comes from the fear of losing your money. Since equity investment fluctuates, when it drops, your portfolio value drops and many investors panic even if it’s just on paper (i.e. you have not sold so it’s not a realized loss).
The flip side is to invest in GICs or leaving it in the bank for 1% return. You definitely do not keep up with inflation here. Your savings lose purchasing power every year. In fact, with the rule of 72, it will take you 72 years to double your money with a 1% interest rate.
You need to overcome your risk fear if you want to put your money at work. It’s that simple. Some people do it by buying properties and renting them for example and others do it with the stock market.
The stock market recovers over time and it’s not a zero sum game, check out the trend below.
What this all means is that when market drops, you should find a way to add money because the market is on sale as opposed to sell.
If you are retired, and with a proper portfolio strategy, you should have cash, or cash equivalent, on hand for the short term fluctuation. You don’t want to be forced to sell during a crash.
Another risk comes from the size of a company. Smaller companies have more growth potential but also more risks. If you look at my portfolio, I only have large cap and mega cap stocks for the most part. It significantly reduces the risk.
| wdt_ID | Market Cap Tier | Value Range |
|---|---|---|
| 1 | Mega Cap | > $200B |
| 2 | Large Cap | $10B - $200B |
| 3 | Mid Cap | $2B - $10B |
| 4 | Small Cap | $300M - $2B |
| 5 | Micro Cap | $50M - $300M |
| 7 | Nano Cap | < $50M |
Dividend Growth Is Important
Regardless of the dividend investing approach you follow, you need to consider dividend growth.
If you focus on total returns, then you tend to want high dividend growth for many consecutive years.
If you focus on retirement income, then you need dividend growth to beat inflation. Aim for at least 5%.
A REIT that pays a 6% yield might seem good but after years of paying 6%, you are actually falling behind on the income front. Inflation is ruining your future income from this REIT.
Be fearfull of investments that do not increase the dividend, or distribution. You must know that and know why you hold it in your portfolio. Your portfolio income has to beat inflation if not all individual holdings.
Why Hold So Many Stocks?
I see portfolios with 40 or 50 Canadian stocks … It’s pretty much the TSX 60 bought at different times.
For example, do you need to hold all the big banks? Just pick 2 or 3 and ride them. How many insurance companies do your need? How about the number of Brookfield stocks?
If you want to take some calculated bets, it’s perfectly fine. At least pick a percentage of your portfolio to allocate to your strategic bets.
Now, statistically speaking, 50 stocks mean a 2% allocation per holding and chances are you have sub-par holdings bringing down the overall performance of your portfolio.
Get a clear picture of your portfolio. Go back and categorize them with all the data points mentioned above.
Keeping so many stocks is like building an index, the only control you have as a dividend investor when building your own index is the income. This can only work in retirement, otherwise you leave a lot of money on the table when growing your portfolio.
The problem with too many stocks is that you have to keep track of that many stocks. It feels like you lack conviction in your decision. You also have the problem of choosing what to do with new money such as adding to an existing stock or even adding a new holding.
The number of stocks in your portfolio is your choice and you need to feel good about it to sleep at night but know what you give up from an optimal perspective. There is no right or wrong way to invest as long as the decisions are conscious!