My Dividend Investing Strategy
Primarily, I consider myself a dividend investor.
I plan on using dividend income to fund part of our retirement. Dividend income, over time, will replace part of our current salaried income.
The following quote is from someone who inspired me on this journey:
"With dividend growth investing, after a few years (maybe a decade) of dividend growth, you can beat the market with yield alone. Price increases are the bonus. But…and it's a big but…do you have the patience to wait years for the dividend to grow? Can you control your behaviour and resist buying 'story stocks' which do not pay dividends? If you can, you'll be set for retirement financing. And here the big bonus: it will not matter if the market is down when you leave work. It's the income you'll be using. Delve into the dividend growth strategy. Learn more."
- Tom Connolly.
The essence of dividend investing and my approach?
1. It produces superior returns over time.
2. Buy only established companies that have a history of paying consistent dividends.
3. Buy only common stocks in these companies.
4. Keep Canadian-dividend paying companies unregistered or in a TFSA (not a RRSP).
5. Always keep U.S.-dividend paying companies in a RRSP.
6. Whenever possible, once dividend reinvestment plans (DRIPS) are established for each company, save and buy more dividend-paying companies to diversify.
7. Continue to diversify number of dividend-paying companies in portfolio.
8. Regardless if the stock price goes up or goes down, stay the course.
9. Do not sell stocks unless there is a dividend cut.
10. Do not sell stocks unless you wish to forfeit 1.
Quick Facts about Dividend Reinvestment Plans (DRIPs)
The major upside...why I do it...
1. You don't control the price of the dividend reinvestment purchase but you can make use of full DRIPs with SPPs to make strategic purchases when the stock price is right for you.
2. Full DRIPs provide dollar-cost averaging (almost every talking head recommends DCA).
3. Full DRIPs allow you to buy partial shares, accelerating your stock ownership.
4. Full and synthetic DRIPs have little to zero transaction fees.
5. Full and synthetic DRIPs take advantage of compounding (didn’t Einstein say compound interest was the greatest mathematical discovery of all time?)
6. Using the transfer agents, if you want a share certificated, it doesn’t cost you anything.
7. Many great stocks do offer full DRIPs with SPPs.
8. Many great stocks have SPPs with no minimum purchase requirement. You can buy partial stock shares for $10, for example.
9. You need to keep track of your adjusted cost base but capital gains only occurs when you sell a stock (if you own great stocks why sell them?)
10. Full and synthetic DRIPs are always working so you don’t have to someday.
11. You can “turn off” your DRIP, easily, whenever you want the dividend income instead.
12. Full DRIPs can be your forced savings.
13. Full and synthetic DRIPs can help take the emotion out of investing.
14. Full or synthetic DRIPs can be a “set it and forget it” retirement plan.
The downside...
1. In a full DRIP you can’t control the price or timing of the dividend reinvestment purchase (fair enough).
2. In a full DRIP you are not using dividend income to be strategic; buying more shares when the stock price could be lower (I cannot accurately time the market. Can you?)
3. Setting up a full DRIP can be time consuming (kinda lame but somewhat true).
4. To set up a full DRIP, in some cases, there are some costs to buy shares and get the share certificated for the transfer agent (fair enough).
5. Even with a synthetic DRIP you need enough dividend income to buy one full share (OK, so buy enough shares to run a full DRIP then!)
6. You need good accounting skills to keep track of your adjusted cost base; especially when you sell your stocks (true, but if you own great stocks why sell them?)
7. Some full DRIPs with SPPs have minimum purchase requirements (true, like CIBC at $100/SPP).
8. You can’t own "the very best companies" since they don’t all offer full DRIPs (not totally correct).
9. There are notification delays (i.e., about a week) from the transfer agents regarding dividend investment transactions; transactions are not real-time (true, but why does this matter when you're holding your stocks forever?)
I plan on using dividend income to fund part of our retirement. Dividend income, over time, will replace part of our current salaried income.
The following quote is from someone who inspired me on this journey:
"With dividend growth investing, after a few years (maybe a decade) of dividend growth, you can beat the market with yield alone. Price increases are the bonus. But…and it's a big but…do you have the patience to wait years for the dividend to grow? Can you control your behaviour and resist buying 'story stocks' which do not pay dividends? If you can, you'll be set for retirement financing. And here the big bonus: it will not matter if the market is down when you leave work. It's the income you'll be using. Delve into the dividend growth strategy. Learn more."
- Tom Connolly.
The essence of dividend investing and my approach?
1. It produces superior returns over time.
2. Buy only established companies that have a history of paying consistent dividends.
3. Buy only common stocks in these companies.
4. Keep Canadian-dividend paying companies unregistered or in a TFSA (not a RRSP).
5. Always keep U.S.-dividend paying companies in a RRSP.
6. Whenever possible, once dividend reinvestment plans (DRIPS) are established for each company, save and buy more dividend-paying companies to diversify.
7. Continue to diversify number of dividend-paying companies in portfolio.
8. Regardless if the stock price goes up or goes down, stay the course.
9. Do not sell stocks unless there is a dividend cut.
10. Do not sell stocks unless you wish to forfeit 1.
Quick Facts about Dividend Reinvestment Plans (DRIPs)
The major upside...why I do it...
1. You don't control the price of the dividend reinvestment purchase but you can make use of full DRIPs with SPPs to make strategic purchases when the stock price is right for you.
2. Full DRIPs provide dollar-cost averaging (almost every talking head recommends DCA).
3. Full DRIPs allow you to buy partial shares, accelerating your stock ownership.
4. Full and synthetic DRIPs have little to zero transaction fees.
5. Full and synthetic DRIPs take advantage of compounding (didn’t Einstein say compound interest was the greatest mathematical discovery of all time?)
6. Using the transfer agents, if you want a share certificated, it doesn’t cost you anything.
7. Many great stocks do offer full DRIPs with SPPs.
8. Many great stocks have SPPs with no minimum purchase requirement. You can buy partial stock shares for $10, for example.
9. You need to keep track of your adjusted cost base but capital gains only occurs when you sell a stock (if you own great stocks why sell them?)
10. Full and synthetic DRIPs are always working so you don’t have to someday.
11. You can “turn off” your DRIP, easily, whenever you want the dividend income instead.
12. Full DRIPs can be your forced savings.
13. Full and synthetic DRIPs can help take the emotion out of investing.
14. Full or synthetic DRIPs can be a “set it and forget it” retirement plan.
The downside...
1. In a full DRIP you can’t control the price or timing of the dividend reinvestment purchase (fair enough).
2. In a full DRIP you are not using dividend income to be strategic; buying more shares when the stock price could be lower (I cannot accurately time the market. Can you?)
3. Setting up a full DRIP can be time consuming (kinda lame but somewhat true).
4. To set up a full DRIP, in some cases, there are some costs to buy shares and get the share certificated for the transfer agent (fair enough).
5. Even with a synthetic DRIP you need enough dividend income to buy one full share (OK, so buy enough shares to run a full DRIP then!)
6. You need good accounting skills to keep track of your adjusted cost base; especially when you sell your stocks (true, but if you own great stocks why sell them?)
7. Some full DRIPs with SPPs have minimum purchase requirements (true, like CIBC at $100/SPP).
8. You can’t own "the very best companies" since they don’t all offer full DRIPs (not totally correct).
9. There are notification delays (i.e., about a week) from the transfer agents regarding dividend investment transactions; transactions are not real-time (true, but why does this matter when you're holding your stocks forever?)
5 comments:
sorry, I'm new to dividend investing; why keep dividend stocks outside of an RRSP? Especially when the returns are better over time?
thank you in advance.
@Anonymous - I keep Canadian dividend-paying stocks outside my RRSP to take advantage of the Canadian dividend-tax credit. In short, you get a significant tax break when you own Canadian dividend-paying stocks unregistered.
In Ontario, you can make almost $50,000 per year in dividends, almost tax-free. Honest:
http://www.professionalreferrals.ca/2009/08/tax-free-dividends-one-of-canada%E2%80%99s-best-kept-secrets/
I hope that answers your question?
Cheers!
"With dividend growth investing, after a few years (maybe a decade) of dividend growth, you can beat the market with yield alone."
I've heard this claim from other disciples of Mr. Connolly. Can someone please explain the math?
@Canadian Couch Potato - I don't fully subscribe to the "after a few years" you can beat the market with yield alone theory but I do buy-in the overall approach; dividend-paying stocks over many years, 10, 20 and more will produce quality returns and income. That's what I'm after, primarily passive income with this approach, not drumming the S&P TSX index although the latter would certainly be a nice bonus.
That said, I'm not sure exactly what stocks Tom was referring to Dan, but I found the following on his site, might be an example of what Tom was referring to:
"This data is from RBC Capital Markets via Rob Carrick inside Globe Investor Gold on March 5 2010. From 1986 to February 2010, dividend growth stocks were up 12% annually; dividend stocks generally, 10.1%; the S&P composite 6.1% and non-dividend payers, get this, only 0.1%. Oh dear. You are thinking you still own non-dividend paying stocks. And notice the dates. February 2010 was after 'the crash'. Dividend-paying stocks not only survived, they thrived. Twelve per cent a year: right some good."
"Yield on Cost: If you bought 1000 shares of Toromont in 2005, your yield on the cost then would now be 2.9%. No big deal, eh! However, if you purchased 1000 shares of Toromont ten years ago for $8,130 your yield on cost would now be 7.4%. That's not bad. Now, if you had bought the 1000 shares of Toromont back in 1990 for $750 your would have received close to $4000 in dividends over the 20 years, be earning 80% on your original investment and had 536% of your original investment paid back with the dividends. Twenty years is a long time, but WOW look what your $750 would be earning now. In addition, you'd have a capital gain of…well work it out. What is the price of a share of TIH now. Multiply by 1000. And you bought 1,000 shares for $750. Maybe you had better investigate dividend growth investing. Data courtesy of MacDougall, MacDougall and MacTier in January 2010."
I'm not close enough to Tom's inner circle, read in subscribers, to know exactly what he means by the math.
Maybe you should interview with Tom for MoneySense? You could do a "pro" dividend investing versus against? It's not to pit one strategy against the other I know, but I support your quest for factual and objective evidence.
Thanks for stopping by, stay in touch,
Mark
@Mark: Thanks for the explanation. The whole concept of "yield on cost" is suspect. I'll be doing a post on this on Wednesday. Stay tuned!
All the best,
Dan