Sunday, March 18, 2018

Dividends Power Portfolio Returns

I am one of the lucky ones I guess. In full retirement mode I will collect CPP, OAS, DB Pension, VA pension and a small non-indexed employer pension.

That is 5 different sources of income. At 71 (another 8 years) I will convert my RRSP into a RRIF. In that account I will just hold a diversified collection of dividend paying stocks.

This dividend income will help supplement and pay for day to day expenses and at the same time grow modestly. I will not hold any bonds or GICs as these do not grow and in the case of bonds can also lose money.

I am also in the enviable position that I do not have to solely rely on dividend income to meet my spending needs. Having this dividend income in retirement will definitely help as a small supplement to my pensions.

What's Trending?

I'd like to highlight some points from a recent Canadian Moneysaver article by Nick McCullum. The article is titled 'Why Dividend Growth Investing Stands The Test of Time'.

  • investors should consider investing in dividend growth stocks as the empirical evidence shows they outperform the broader stock market over time.
  • the S&P 500 Dividend Aristocrats Index with 25 years of dividend increases has delivered annualized returns of 10.85%. The broader S&P 500 Index has returned 7.51% during the same period.

Three Main Reasons Dividends Rock

  1. Companies that pay rising dividends need to be generating actual earnings and cash flow to support SAID dividend.
  2. because there are less of the retained earnings available, this means the capital allocators of the company have to be very selective of growth opportunities. This enhances the decision making process.
  3. Steadily rising dividend payments are indicative of a shareholder friendly management culture. Insider ownership is well above average.

A Worthwhile Strategy

Mr. McCullum goes on to give some other reasons for a dividend growth strategy for those conservative long term investors;
  • many of the best known and successful dividend growth stocks are market leaders in slow businesses with strict barriers to entry
  • dividend aristocrats are underweight sectors prone to disruption
  • overweight sectors that change little over time like health care, industrials' and consumer staples stocks
  • Graham first used the strategy and highlighted it in 1934. He is aka the father of value investing.
"The prime purpose of a business corporation is to pay dividends regularly and, presumably, to increase the rate as time goes on."
- Benjamin Graham

Warren Buffett's investment portfolio is full of high quality dividend paying stocks.

In Sum

I employ this strategy as outlined by Nick in this article. He is another in a long line of others who invest the same way. If you don't like buying individual dividend growth stocks (it can be stressful) all ETF companies offer a dividend product. Products like CDZ, XDV and VDY are some of the popular ones in Canada. I don't own them but they are a great way to start, keep in mind the monthly expense to own them can get costly and become a drag on returns.

Google the stocks for more info.

Del Vicario on Growth Stocks

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