I realized that I have been blogging about dividend investing for a couple of years now but I never really wrote about the reasons behind it all in one post. I touched the many points that I value with dividend investing but I thought that I should go over what really satisfies me with dividend investing.
Before settling with a dividend strategy, it’s always good to know what strategies are out there and evaluate them. I repeat, evaluate them as opposed to try 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.
The following are investment strategies that I am aware of and the reasons why I eliminate them.
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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 option 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. It’s a popular strategy considering there are 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 in the past before I started blogging. He now has a blog dedicated to the couch potato investing strategy. Ok, so I have not eliminated this strategy, in fact, I use it with my RRSP through my defined contribution plan but I am not ready to make the jump like Andrew did. It lacks the predictability I have with dividend investing.
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 confortable seeing the value go up and down (hopefully always up) based on my diversification and risk. It’s important that you know yourself and avoid chasing profits because your extra neighbor made some money on Nortel or Bre-X.
I already hinted on 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 side 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 hope
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 a 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 (previously CIBC Mellon) for a couple of years now and I am starting to see how 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.
At the moment, my portfolio DRIPs all my stocks where possible. 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. For example, LIQ.TO (Liquor Store) buys back 2 shares per month right now – that’s 24 more shares at the end of the year or an extra $2.16 in dividends simply because I DRIP’d. These small amounts across a portfolio start to add up and when you put them to work, your money is continuously working for you.
Readers: What works for you with your investing strategy?