Each week I spend some time presenting links to these information sources here in this weekly post. Here are this weeks posts – let me know if I missed any using the comments.

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What is a Decision Process

Essentially, a decision process is a model or steps an investor can use to help them reach an ultimate decision. It helps because it formalises your thinking so that you can focus on the right questions, topics, and root causes for the issues your portfolio may have.

For example, if your portfolio has been lagging the returns of the overall stock market, it may seem like an easy assumption to make that you are holding the wrong stocks. However, with a structured approach to attacking the problem it may become apparant that the problem is not the stocks but your ratio of stocks to bonds. It is the job of your decision process to determine which of the two are the real problem and then to identify solutions

Why Not Just *Wing* It

It is human nature to make decisions constantly. Every second that goes by we have made another decision. For general day-to-day things this can be just fine. However, when things get more complicated, or out of our comfort zones (like perhaps dividend investing) quick decisions are not ideal because we make them using unresearched and /or missing information. Often we don’t even know what we don’t know!

What to Do About That Struggling Portfolio?

Your protfolio can be struggling for a number of reasons. Your asset allocation may be way off or your mutual fund fees are eating away at every ounce of returns you were hoping for. What ever it is, your job is to figure it out an act upon it.

To do this, I would like to suggest that you follow a simple model that will take you through a series of steps to understand the issue and create a plan of action. The model below is one approach to doing this.

The process starts at number 1, where you as an investor has really only identified that there is a problem. From there, you need to explore and dig deep into where this problem is coming from. This can include extensive brainstorming as well as using message boards to ask questions pertinent to your issue. From there, you progress through the process to ultimatly end up a number 6 where you implement your chosen solution and then move on to evaluate later down the line.

Summary

Through expereince I have found that the best way to make decisions that impact my dividend portfolio is to attack the issues and struggles with a systematic and thoughtful approach to the problem. I do not know everything about investing and there are certainly things to think I know but may be wrong on. Using an approach like the one above has helped me to make much more informed decisions that are not just ‘off the top of my head’. Give it a try yourself and see how it works.

(Photo Credit)

Each week I spend some time presenting links to these information sources here in this weekly post. Here are this weeks posts – let me know if I missed any using the comments.

(Photo Credit)

Why I Own Canadian Dividend Stock

As I said, I am a Canadian and I will more than likely retire on Canada. As such, my future income requirements will be in Canadian dollars and it makes sense to generate some of that income in Canadian dollars.

A second reason is that there is no withholding taxes with Canadian stocks as there are with global stocks. If you hold a US dividend stock outside of an RSP then you are required to pay 15% of that dividend to the IRS (your broker does this on your behalf).

Why Not All Canadian Dividend Stocks

Canada’s stock market makes up about 3% of the global markets. This is not much at all. If I only invested in Canadian stocks then I would be missing out on large growth opportunities as well as the numerous, and high quality, global dividend stocks.

Another key reason is that only investing in Canada is no diversified. Just as a US investor should not only buy American, a Canadian should look outside of the four walls of the country to reduce the risk.

Canadian Dividend Aristocrats

Like our neighbours to the south, we have a Dividend Aristocrat list that is compiled of companies that have increased dividends for at least 7 years (much less than the US index).

However, a couple of things should be mentioned. Although it is a good place to start looking for investment prospects, the list is smalller and holds a lot of banks and income trusts. Nothing wrong with banks, you just want to ensure you diversify away from banks as well.

Income trusts on the other hand are not your typical company and need to be analysed differently than a “normal” company. I have not personally gone down that path. My suggestion for people looking at income trusts is consider an ETF focused on that subset of the market.

My Recent Purchases

In the past month, I made a couple of additional Canadian dividend stock buys.

The first was dividend growth stock Canadian Pacific Rail (cp.to). One of Canada’s big railroad stocks, it has shown good growth of earnings and a positive dividend growth record.

The second dividend stock was long-time Canadian dividend favourite TransCanada Pipelines (trp.to) which is one of Canada’s longest standing dividend stocks. I have been watching his one for a while and finally found a place for it in my portfolio.

The third stock is not a dividend growth stock, but does pay a good dividend. If you have been reading my blog in the past you may recognize that I owned it once before. The company is BCE Inc. (bce.to) and it’s high dividend and recent strong performance moved me to act. This will not be a long term hold for me, but I am going to collect the dividend while I hope for the stock price to rise.

Good Day Eh!

Even if you are not from Canada, there are some dividend growth stocks to consider. CP an TRP are two, as are banking big Royal Bank of Canada or oil and gas player Encana. They could provide some diversification an some extra income too.

History shows this is a mistake

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As you can see dividend paying companies outperform companies that do not pay dividends in both the short and the long term.
Besides the obvious advantage of getting better returns over time, there are several “hidden advantages” to investing in dividend paying companies.

There is less work involved in investing in dividend paying companies. An investor focused on putting his or her money into dividend paying companies needs to do a sufficient amount of research. They should make sure that the company is profitable, make sure the dividend yield is significant [over 2%], they should make sure that the dividend has been increased over time, and that the company is poised to grow and become more profitable each and every year. After the initial purchase however, things should be on autopilot for the most part. Dividend investing is not about trading and trying to make a quick buck; it is about buying and holding for as long as you can. You should still monitor your investments and make sure that the companies you are investing in are still doing well, but the work involved in dividend investing does not even compare to other types of investing.

When you are investing in dividend paying companies and you plan on buying and holding for the long term, you only need to be correct once, in which company/companies you buy. When you are trading or at least more active in trading, you need to be right three different times to be profitable. You need to be correct in your assumptions of what company to buy, when to buy it, and when to sell it. I do not know about you but it is hard enough for me to be correct once, let alone three different times. If professionals have a hard time profiting from rapidly buying and selling companies with little rhyme or reason, what makes you think that you would be successful in doing so? Warren Buffet did not make 40+ billion dollars from investing in companies he knew little about and then quickly selling them. Buffet buys a stake in a company and expects to hold the company for decades, not days, weeks, months, or even years.

There are less low points in dividend investing. This is a documented fact. You will not completely avoid recessions, depressions, or simple downturns in the market by investing in dividend paying companies, but you will experience higher and less “lows”. Dividend paying companies are much more stable then companies that do not pay out dividends for several reasons. Dividend paying companies tend to be profitable and they tend to trade at lower valuations. Also investors do not put their money into dividend paying companies with the intention of selling the next day, they buy and hold these companies for the most part.

There is simply much less risk involved in dividend investing. Not only will you get better returns in the long run, your portfolio will be more stable and you will not have to do nearly as much work. It’s a no brainer!

(Photo Credit)

Each week I spend some time presenting links to these information sources here in this weekly post. Here are this weeks posts – let me know if I missed any using the comments.

(Photo Credit)

There are three components to an investment plan that every dividend investor must ensure is in place. In my opinion, before you make another move in your portfolio these aspects must be addressed. The risks of not doing them places you with too much risk and with too much risk comes emotional decisions which can lead to negative consequences.

The best way to address each component and to ensure you are covered is to ask yourself three questions. Let’s look at each question and the details, think about your next steps when you review your portfolio.

Question 1: Are You Saving as Much as You Can?

The best thing you can do to help have more money in the future, is to maximize the input. Simply put, that means saving as much as you possibly can as regularly as you can. This chart (source), shows the drastic difference various contributions to a retirement (or any savings plan) can have.

Action: Take a look at your current cash flow, see if there is opportunity to allocate more of your income to your savings account.

Question 2: Do You Really Understand Your Risk Profile?

Your risk profile determines what the ratio of assets should be in your portfolio. This is fundamental to your portfolio because if it is not correct, you will make stupid decisions that are based on emotion rather than sound investing knowledge.

Action: Head over to Index Fund Advisors (ifa.com) and complete the Investor Risk Profile. From there you will truly understand what your risk profile is.

Question 3: Are You Diversified?

The final question concerns the most important aspect of your portfolio – the asset allocation. If your asset allocation is done right and you have the right components in your asset allocation, you will be adequately diversified. The question you need to answer is: is your portfolio is adequately diversified.

The way to do that is to take a look at your portfolio. Do you have only equities? Do you have only fixed income? Are you in mutual funds or just stocks? If you are in only stocks, then how many do you have?

There are a number of ways to look at diversification, so the quickest thing to do is to learn more about asset allocation and what it take to build a good portfolio. You can start right here by searching through my blog, or head over to ITA Wealth Management Blog where there is lots of asset allocation coverage.

Action: Read more about asset allocation and diversification. Take a look at my Top 20 investment books post for the ones on asset allocation and read them.

Summary

As a dividend growth investor, these three question are crucial to ensuring you start to look at your savings plans and portfolio.  Take the action steps now, answer the questions and make that portfolio as strong as you possibly can.