Indeed, I am approaching my magic number but I can’t say I am feeling like it’s a big milestone. With the inflation we have had, and the cost of rent for my adult kids wanting to move out, the number doesn’t seem adequate anymore … but we will cover that another day.
The good thing is that I have the tools and the strategy to keep at it until I reach the comfortable number.
The Unanswered Question
The road to building this portfolio has not been a straight line and I don’t believe anyone will do it in a straight line either (except my kids maybe … it’s like take two for me).
I won’t go too much into the beginning of my story since it’s covered in the ‘About’ section, however, the biggest question I see online, on Twitter, on YouTube, or on any other social media is “Where is the money coming from?”.
The question arises when online personalities start highlighting their annual dividend income, their yield, or other metrics without clarity. You’ll read $65,000 in dividends or a 10% yield but you can’t tell how much money there is behind those numbers… It’s hype without substance.
Let me first say, don’t let the numbers fool you though.
- $65,000 in dividends with normal blue-chip Canadian stocks would imply a dividend yield of 4%. Using some simple math, the portfolio is valued at approximately, $1,625,000 with a 4% yield. The next question is how do you build that? Well, savings mostly since the usual blue-chip stocks would give 8% return.
- 10% yield is just plain ridiculous and you have to assume it’s the yield on cost. Sadly, the yield on cost is a poor feel-good metric. When you dig in and review holdings when available, you can see that it could be around 6% when using specialty income products like split-shares. It also doesn’t offer dividend growth, so the portfolio cannot keep up with inflation ever !!!
- Another one creating questions is annual dividend growth of 20%+, which is approximately my annual dividend growth but I add money every year, so the same should be assumed that other investors do that. The dividend growth alone should always be assumed to be 10% max. That means the remainder comes from new money or a yield improvement from 2% to 4% for example.
The question readers ask is a fair question as nearly all readers are trying to relate. Is this achieveable for me? Before we get to that, dividend investing is easily understood. and many use it, but not many master it.
Many books also cover entry-level dividend investing. The one that did it for me was The Lazy Investor back in the day, and today there are many more preaching discipline and steady wins the race.
Caution: Investing in our early years is meant to build wealth and not retirement income. This distinction is important as you want your portfolio to get as big as possible without taking unnecessary risks.
The goal of your portfolio during the accumulation years is to build wealth but the first thing every investor must do is understand investing!!!
Paying high mutual fund fees to fill the pocket of an advisor doesn’t work. Otherwise, you wouldn’t be reading this. You are here as a dividend investor with the goal to build an income from your portfolio in retirement.
While I started with the usual bank dividend stocks, utility income stocks, and the ever loved telecom stocks, after about 4 years, I switched to dividend growth stocks. I had a solid retirement portfolio when I started, the problem is that I wasn’t retired and had many years ahead to invest. My total dividend yield today is 2.35% while my taxable income account is 4.81% (mostly the banks).
I have consolidated the banks out of all the other accounts and into the taxable account. Now the question is if I keep them … well BNS will go away after it bounces back. At least that’s the plan.
Earning 8% return annually including dividends was not enough. Sadly, the banks, utitlities and telecoms provide you with around 8% return.
This is where the rule of 72 and your annual rate of return come in.
- You can find your annual rate of return from your online broker, I assume you use the best online broker out there.
- Get that number from your online broker and divide 72 by your annual rate of return. That’s how long it will take to double your money!
Check out the growth of a TFSA account at 5% and 10% return following the years since it was introduced.
Say you want to retire in 30 years, how many times can you double your portfolio in that time? So you see, going from a rate of return of 8% to just 10% makes a big difference. This is where if you cannot beat the best S&P500 ETF, just buy the ETF. Once you reach your retirmenent number, you can switch back to your faithful retirement portfolio.
Learn Fast: Don’t take unnecessary risks that prevents you from sleeping at night but understand how fast your money grows – not your dividend, that’s just a factor of how much money you have.
The Road Ahead
I make investment mistakes, and I learn from them.
Expect to make mistakes during your investing journey but what’s important is not to be perfect but to get back on track and learn from those mistakes.
Aside from becoming a dividend investor, the biggest mistake I made was focusing on my dividend income … I remember Mike Heroux and I going back and forth about dividend income and total return years ago on his The Financial Blogger blog at the time.
Yeah, the dividend income is just a factor of your portfolio size with an approximate yield of 4% in retirement. It’s simple, anything above is not very sustainable and doesn’t offer dividend growth. Once you reach your number, you can either switch to income stock, or withdraw 4%.
See, 1,000 shares in BCE from 20 years ago, or 1,000 shares of BCE today pays the same dividend. It doesn’t matter how many dividend growth or what your yield on cost is, it’s the same 1,000 shares with the same dividend per share today.
High income investments was also another mistake – income trust anyone? Well, put REITs in the bad investment as far as I am concerned.
Think of it this way, you have three strings connected and each edge represents one of those:
- Dividend Yield
- Dividend Growth
- Total Returns
Imagine the strings in a circle and the further out you push one edge, the higher the number. The problem is that the more you try to get one higher, the other two will come inside and reduce the number.
The moment I switched to dividend growth investing, my portfolio started growing in value faster and that’s when I also started discussion about the accumulation years vs the retirement years for investment strategies.
How do you find stocks with the right growth and safety … It’s not easy. More specifically, total returns and dividend growth aren’t free anywhere. The Dividend Snapshot Screeners can help you out here.
Consideration: There is a relationship betwee all three that cannot be avoided. You cannot have your cake and eat it.
Diligent Savings + Luck + Additional Income
Your saving rate plays a critical role in your portfolio growth. The more money you put to work early, the faster it compounds! Our family saved diligently and I will say to everyone that I have never spent more than 30% of my income on rent/mortgage. That’s 30% of one income by the way.
The 30% used to be a rule mentioned in the Wealthy Barber but that’s hardly possible these days unfortunately so put that into context.
As a single income family, I decided to start a blog to learn new skills and it turned into a side business. Don’t get me wrong, it took a few years of blogging before I even made a few thousands in advertising. All the income, a secondary income and not a third income, was contributed to my RRSP to avoid taxes.
Lady luck was on my side a little as I started investing in the crash of 2008. I went all in with BCE, BNS and some others. I diligently filled my TFSA every year. I also bought a lot of US stocks when it was at par with the Canadian dollars. Today, I don’t really look at the exchange rate as my US holding just outperform it all.
I aim to be the millionaire next door. I live simply without trying to be a frugal spender across everything. Overall …
- My income has grown a bit faster than inflation, so my saving rate has grown year after year.
- My mortgage is paid off, so my saving rate has grown.
- My employer matches my RRSP contribution, so that’s money I do not work for.