Before settling on a dividend strategy, it’s always good to know what strategies are out there and evaluate them. I repeat, evaluate them as opposed to trying them. Some of you may end up trying some, I know I did, but it’s not a requirement as you don’t have to feel the pain of losses to learn a valuable lesson sometimes. It’s also perfectly acceptable to have multiple strategies in flight where a portion of money is set aside for that. Some investors cannot resists doubling down on an investment for a big payday – if that’s you, just do it responsibly.
The following are investment strategies that I am aware of and the reasons why I eliminate them. We know investing is important but equally important is to ensure your investing strategy makes you money.
Mutual Fund Investing
I was naive when I was young and thought this was the way to invest when you did not have much money. I struggled with finding funds that satisfied me over a number of years until I picked a dividend paying mutual fund – the same one I still owned today. I grew to despise mutual funds, though. Managers come and go, companies are bought and sold, there is basically very little stability in the back office.
I tried this for a short period of time and I made some money during the late 2007 and early 2008 but I did not do so good in the late 2008 and realized that it was just luck that I made some money. I was buying on momentum (like the Apple trading that goes on) and sometimes it worked but other times it did not :(
I never traded options but I knew early on that it was not for me. The only options trading I am interested in is covered calls but I have not done it yet. You can basically earn more income from your holdings and that’s something I am interested in trying. You do need to take the time to learn options trading and be comfortable. It’s a popular strategy considering there are dividend ETFs enticing you with high yields based on their ability to generate the extra income on top of the dividends. It’s not without risks, though.
This is the Warren Buffett’s proven strategy. I am not sure I can find value investments… Andrew Hallam had a knack for it before he switched to index investing but he still dabbles in it for his investment club. I am not sure I have the ability to find long-term buy and hold value investments. I’d rather be an index investor.
Index Investing – a.k.a Couch Potato Strategy
Index investing is a solid investing strategy that I learned from Dan Bortolotti through his Money Sense articles. He has a blog dedicated to the couch potato investing strategy. I have not completely eliminated this strategy as I use it with my RRSP through my defined contribution plan but I am not ready to make the jump for all my accounts. It lacks the predictability I have with dividend investing and the performance I have.
Why Dividend Investing?
Now that I have reviewed some strategies and why I eliminated most of them, I’ll go over the dividend investing characteristics that work for me. “Work for me” is an important statement because I am not saying one strategy is better than another but rather that it works for me :) I am not competing with anyone nor am I competing with an index, I am working to grow my portfolio in a way that I am comfortable seeing the value go up and down (hopefully always up) based on my diversification and risk. It’s important that you know yourself and avoids chasing profits because your extra neighbor made some money on Nortel or Bre-X.
Based on the investment benefits from dividend investing outlined below, I have established my 7 dividend investing rules to be successful. To ease you in with dividend investing, you should start with looking into the available dividend lists such as dividend aristocrats, dividend achievers, and the dividend ambassadors.
Regardless of your strategy, make sure you are well set up to track your portfolio performance. It’s important to know your performance and make the best investment decisions according to the wealth triangle.
I already hinted at the predictability part in my index investing comments above and that’s very important to me. I discovered that during my mutual fund investing phase. The dividend earnings allow me to have some kind of predictability on growth when re-invested. Add the average dividend growth for the company and you can easily extrapolate some growth even without changing the stock price. Just look at the dividend aristocrats on both sides of the border to see how predictable some of those companies are.
Retirement, or financial freedom, is about reaching a target. For me, the target is income generation as opposed to an age. I don’t want to invest and hope that I will have X amount when I reach a specific age because I can’t predict. Of course, no one can accurately predict 20 years down the road but with dividends, you can still extrapolate with some certainty in the short term and a confident outlook for the long term. With dividends, you can definitely plan as opposed to hoping :)
Safety During Market Lows
Again, I learned through my mutual fund investing phase that the dividends were a great safety net. The movement in price doesn’t affect me as I know I will still get dividends and I have the opportunity to buy more shares when the price is low. You still have to manage dividend cuts but it’s not the norm.
Compound growth is the magic! It takes years to see the benefits but it’s well worth it. I have been investing small amounts with Computershare and Canadian Stock Transfer since 2009 and fractional shares are adding to my growth already. I have about 30 years to really benefit from compound growth, imagine how powerful it can be for my kids with 60 years ahead of them. At 10 years old, they are officially shareholders looking to benefit from compound growth.
Look at what dividend can do compared against an index with most stocks not paying a dividend. Imagine if all your investments are strong dividend growth stocks. You can accelerate the compound growth. All of my investment accounts are set up to DRIP for full shares only with a discount broker or with fractional shares through Computershare.
I don’t buy many shares at a time and it may come a day where I will stop my DRIPs to strategically balance my portfolio but I am happy DRIPing for now. DRIPing allows me to accelerate my compound growth to quarterly growth and in some cases monthly growth. These small amounts across a portfolio start to add up and when you put them to work, your money is continuously working for you.