Wednesday, March 28, 2018

Dividend Stocks - The Gift That Keeps On Giving


Once you buy your first dividend growth stock, all that is left to do is sit back and watch the money get automatically deposited into your account. It really is that easy.

This is like getting a paid holiday every month. I mean where else can you get paid without doing any work or sleeping in every morning. You're getting paid for virtually doing nothing but by owning a big mature company, like the one that provides your data and cell phone service.

For the average Joe investor/retiree like me it is the fastest way out there to build wealth and my retirement nest egg. 

Most investment studies out there also report that over the long term investing horizon you will enjoy a higher rate of return than any other investment.

It is further reported that in the last 40 years, over 70% of the stock market's total return have come from dividends. You can buy stocks that don't pay any but why would you?

Why exactly, is right. Given enough time I believe you can become wealthy adopting this dividend growth strategy for yourself. Here are some other reasons to become a dividend growth and income investor.


How to Stimulate Returns


I am a fan of Tom Connolly over at dividendgrowth.ca as mentioned in earlier posts and also John Heinzl who runs the Yield Hog portfolio over at the Globe and Mail newspaper.

I strongly recommend subscribing to both as a matter of hand holding you through the dividend investing process. You will find reading what they have to offer of great value.


Returns are stimulated by letting them grow over time. Benign neglect after purchasing your stocks is the way to go. Stick to banks, telcos, utilities and others you know like grocers and railways. It's what I do.

Don't Become A Mercenary

You don't want to chase dog stocks with high yields. If you salivate when you see stocks paying you 10% or more, go get some fresh air. Don't buy them it's a sign of danger.The reason for the high yield is the stock price is tanking. The company is most likely in deep debt and the market doesn't believe it will make money and grow.


What if The Market Wrecks?

When the market drops as a whole like it did this past week there can seem to be nowhere to hide. The question becomes, what comes back the fastest? Selling is the worse thing you can do on those down days so just hang in there. After the crash of 2008/9 dividend investors got crushed. This ended up being a huge buying opportunity and not a time for selling. The market is up over 120% since then. However, those invested in a 60/40 portfolio recovered losses in 50% less time than a straight dividend equity portfolio. There still is a place for balance and bonds in a portfolio. Everyone panics in a sell-off. They say they won't but we all do.

Hunt for Rising Dividends


Hunt for stocks that have increased their dividends at least for the last 5-10 years. This tells you that the company is profitable and has more cash available to pass on to investors. This is our safety net and will allow as to stay ahead of inflation every year.

With the cost of living always on the rise it is important to hunt for those companies that also raise their dividend year after year. I personally like to buy stocks with a 10 year growth record. In 2007 Telus paid a dividend of 75 cents. Last year it paid $1.95. It yields 4.33%, perfect!

Get Rich The Lazy Way 


If you like the dividend growth strategy and only have a small amount of money to get started then why not look at an ETF?

You can look at the Vanguard family and an ETF like VDY or iShares two offerings of XDV and CDZ. There is an on-going cost to ownership so check the website and the fact sheet for each specific fund and how the manager invests the money.

You can also check out this previous post; Using ETFs for Dividend Investing for more info.


Pick The Home Team


I don't pick individual US or International stocks. I stick to large cap Canadian companies so I can also harvest dividends and in a non-registered account benefit from the dividend tax credit.

Dividend stocks also do better than bonds when you invest this way. Check with your province of residence for applicable rates. If you use Turbo Tax or UFile these rates are calculated automatically. You mean there are people out there that still use a pencil?



Keep Taxes in Mind


Canadian domiciled ETFs have a definite tax advantage over US ones. The downside of these funds is they are more expensive than their US cousins.

They also carry fewer stocks when compared to the US family. The other problem is exposure to certain sectors. Canadian dividend ETFs like CDZ and XDV are heavy on financials, telcos and utilities. They are also taxed more favorably by the government, so there is that.

Become A Stock Picker


If you have finally decided that going the DIY investing journey is where you want to go then I would also suggest doing what I did. Stick to the big companies who have b
een around forever. Stocks like BCE or BMO as an example. Pick at least 5-10 stocks to get going. If you still want to get going but don't have enough money to buy at least 100 shares of each then you might want to stick to ETFs.

A Starter Portfolio


Always make sure you do your own research and are very comfortable with this strategy. You are not going to get wealthy overnight investing in dividend stocks.
Matter of fact it is pretty boring but sometimes just leaving these stock picks alone and watching them grow over time is excitement enough. Kind of like watching your kids grow through life.

BCE - telco
EMA - utility
TRP - pipeline
T - media
ENB - utility
CNR - industrial
BNS - bank
TD - bank
IFC - insurance
CU - utility

Total Yield = 4.36%

I would stick with stocks yielding at least 2% and in the 4-5% range. Anything above 6% in this environment would be taking on too much risk for me. 


I own all the stocks mentioned above except IFC. This is a great starting point but you can go look at all the ETFs mentioned previously and simply buy the top ten holdings they list.


Related Post: Dividends Power Portfolio Returns

Recommended Reading:

Del Vicario on Growth Stocks

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