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Why Dividend Investing?

Questrade Democratic Pricing - 1 cent per share, $4.95 min / $9.95 maxI 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.

Investment Strategies

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.

Market Timing

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 :(

Option Trading

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.

Value Investing

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.

Predictability

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

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?

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10 Responses to "Why Dividend Investing?"

  1. For me the biggest incentive for dividend investing, especially with dividend growth companies, is reaching the eventual goal of financial freedom \(^_^)/ I’ve read about covered calls before and am curious to find out if options have a useful place in my portfolio, but have never dealt with them before. But now you’ve peaked my interest Mr.Passive. I will open up an options trading account later this year and experiment. I find the best way for me to learn something is to get down and dirty, and just do it ヽ( ̄д ̄;)ノ

    • The Passive Income Earner says:

      @Liquid Independence
      It’s always a learning journey :) Dividend Monk has used covered calls from what I gathered from a post. It’s another tool to earn some income. How did you settle with dividend investing to achieve your financial journey?

      • Once I thought about the favorable tax treatment of dividends I haven’t found a better alternative sense. In reality I will probably retire on a combination of dividends, CPP, and rental income though.

  2. What can I say? Great post :)

    I look forward to reading your progress, sharing thoughts and pushing each other for higher dividend income.

    Mark

  3. Jeffrey says:

    Will you comment on how many dividend stocks you own or seek to own and your reasoning behind that number?

    Thanks!
    Jeffrey

    • The Passive Income Earner says:

      I don’t have a target number but just based on the number of industries/sector and not holding too much in one company over another, I can see owning between 40 and 60 companies overall. It’s a lot but I track nearly 150 companies at the moment and I tend to stick to that filtering for now. The holdings are split between US and CDN companies as I find the US conglomerates to be very strong dividend investments and over time the $US will over take the $CDN.

  4. Mandy says:

    Hi

    This is great information and I would like to ask a few questions.

    a) If I already have shares of lets say BMO in my brokerage account – does it cost anything to have my brokerage transfer this share to Computershare?

    b) If I setup this full drip on shares I hold in Computershare – does Computershare offer to hold them under a TFSA? That way when I am to sell in the future I won’t be charged any tax.

    Appreciate your commments and love the way you explain things on your blog!

    Mandy

    • The Passive Income Earner says:

      Hi Mandy,

      Thanks for stopping by. Here are the answers:
      a) yes it does cost money as you need a share certificate
      b) only non-registered account is supported by Computershare at the moment. For TFSA and RRSP, you need a discount broker.

      Hope this helps!

      • Mandy says:

        Thanks this does give me a better idea however:

        a) If I already own the shares within my brokerage account am I not already paying for a share certificate?
        b) In this case the only disadvantage of keeping my shares in the brokerage account (which is currently a TFSA) is that I am not able to purchase partial shares?
        c) Since I already have investments in TFSA (such as the shares I’m thinking of potentially moving over to the transfer agent), is it better to max out my TFSA and then start investing with a transfer agent?

        Cheers,
        Mandy

        • henry says:

          Mandy:

          When you buy stocks through a broker the shares are in their name not yours. If you want a certificate you have to pay for it, usually $50.

          The other option is to ask the broker to “Transfer the Shares In Kind” to Computershare (once you’ve opened an account with them). That way you don’t need a certificate. They still may charge you a fee, but a small one.

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