Before settling on a dividend investing (or dividend growth investing) strategy, it’s always good to know what strategies are out there and evaluate them. I repeat, evaluate them as opposed to trying them. There is no need to lose money with penny stocks…
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.
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 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 cashflow in retirement as you will still get dividends and you 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 when you hold a solid dividend growth stocks. Not all dividend stocks are equal, you need to invest in a quality dividend stock.
Compound growth is the magic! It takes years to see the benefits but it’s well worth it. I started investing small amounts with Computershare when I started investing and fractional shares go a long way in putting all your money at work.
When you have a long term horizon to really benefit from compound growth, imagine how powerful it can be for young kids with 50 years ahead of them.
Investg in Quality Dividend Stocks
It’s not just any dividend stocks that you want to invest in to build a money making portfolio. It’s also not just about the yield …
Here are two metrics you want to monitor to build a money making portfolio.
Consecutive Dividend Increases
This is the most critical metric to start with when looking for a dividend stock. If the company can continuously increase the dividend year after year through recessions and hard times, it therefore has a solid and reliable business you can invest in.
Dividend Growth Rate
Once you find companies that regularly increase the dividend, then it’s a matter of finding the stocks that can grow the dividend at a good rate.
If it grows by a penny annually, it’s not much … You want a company that makes profit and can reward investors with growth.
This is where it gets a little tricky …
Dividend growth has a correlation to profit and dividend paid. If a company makes a good profit, it has the choice to split how to use the money by reinvesting in the company or paying a dividend.
- If a company has a higher yield, it usually grows the dividend slower. This is like the big Canadian banks. Their dividend growth is around 6% on average.
- If a company has a low yield, it usually grows the dividend faster. This is more like Alimentation Couche-Tard, Intact Financial, or Dollarama Inc.
At a minimum, I look for 6% dividend growth, and I want 10% for a Chowder Score.
The Difference Between Retirement & Accumulation Phases
Different dividend investments fit different needs during the retirement and accumulation phases.
It’s an important distinction when investing as I regularly see young investors with a retirement income portfolio leaving lots of money on the table …
During the accumulation, you add money to your portfolio. You can dollar cost average your positions, and you can reinvest your dividends. In short, you compound it all. You want to focus on having your money grow as much as possible. When you invest with dividend growth, you get a higher annual rate of return by at least 3%.
In retirement, where you want to live from the income of your portfolio, you want to maximize the income with a higher yield while maintaining some dividend growth to keep up with inflation.
The mistake WE ALL MAKE is that we build a portfolio for retirement and focus on what we need in retirement but we only need that once we get ready for retirement. Until then, we all need the biggest portfolio we can get!
One way to help with both is to have your portfolio constructed with a few categories of stocks.
- Core Stocks: Those you have forever, like the banks for Canadians. Not usually the best yield or the best growth. A solid blend with stability.
- Dividend Growth Stocks: Your money makers! Venture south of the border for better options. Way more growth in the US markets.
- Dividend Income: Your income stocks that pay a solid yield and that includes covered call ETFs.
- Opportunistic: Some bets you want to place. This includes crypto if that’s really something you must be in … but also stocks like Google, or Amazon for example.
Then you want to make sure you have your portfolio with the right exposure ratio. These are example.
|Dividend Growth Stocks||40%||20%|
Available Investment Strategies
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 …
Investing in penny stocks can almost be the same thing but with penny stocks. The big difference is that you can easily lose it all.
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.