Investing has become an extreme sport of late. If you are looking for growth; you’ll have to ride the stock market rollercoaster. While you will eventually end-up with more money in your pocket, you will have to endure several “end of the word news headlines” and bad quarter results in the meantime. On the other hand, if you are looking for secure investments, you will run into a different brick wall with interest rates around 2% for a five year term deposit. That doesn’t even match inflation and you’ll eventually start considering Kraft Dinner for supper three times a week if you plan on living off your investments at retirement.

 

Tell me, what are you going to do with your next $10,000?

 

I’ve personally decided to put my confidence in dividend stocks, nothing else, I go all in for Dividend Investing. Why? Simply because dividend stocks suffer less in a bearish stock market while earning a lot more than bonds and CDs.

 

 

Dividend Investing is Perfect to Make Money & Beat Inflation

 

For the past 85 years, dividend stocks have contributed 43% of the total S&P500 annualized returns.

dividend stocks in S&P500

Image source: JP Morgan Asset Management

 

Therefore, this investing strategy doesn’t only generate a constant income stream but it also performs well over time. By building a 3%+ dividend yield portfolio with an overall dividend increase of 2-3% minimum, you are also assured to beat inflation over the long haul. In other words, your portfolio doesn’t only generate a 3% dividend yield today but your payout will grow faster than the rate of inflation. If you plan on living off of your dividend income, this source of income had better be indexed better than a pension plan! Doesn’t this sound like a good retirement investment for you? No more mandatory Kraft Dinner meals!

 

Dividend Investing is Not Complicated

 

The first reason why I decided to go with dividend stocks is that it makes my investment process a lot smoother. When you select dividend paying stocks for the long term (and I prefer stocks increasing their dividend each year), you know you are picking a healthy company for the most part. Since they are ready to distribute a part of their profits, it must be because they feel confident in their future. But the dividend yield is not enough to pick the hen who lays golden eggs. My dividend stocks must comply with the following criteria:

 

  • Dividend Yield >3% (I’m going after yield after all)
  • 5 Year Dividend Growth >1% (I want this yield to grow over time)
  • Dividend Payout Ratio < 75% (I want sustainable dividend growth)
  • 5 Year Annual Income Growth >1% (I want potential for more dividend growth)
  • ROE > 10% (I want companies making great investment returns)
  • P/E Ratio <20 (I don’t want to pay too much for the stock)

 

I use those metrics because they are simple and easy to use with free stock screeners such as the TMX.

 

How Can You Buy US Stocks in a Canadian Account Without Paying Taxes?

 

Let’s face it; the Canadian stock market is too small to build a sustainable, diversified dividend growth portfolio. Once you have picked a few banks, telecoms and REITs, you will have a hard time finding additional diversification. This is why your portfolio should contain in good part several US dividend stocks. There are plenty of world-class companies paying healthy dividends south of the border.

 

The problem is that there is a whole tax issue around US dividend stocks. How can you buy them without having withholding taxes? You can avoid taxes by adding your US stocks to your RRSPs and keeping your Canadian stocks in your TFSA for example. I suggest that you manage your portfolio as a whole (non-registered + RRSP + TFSA asset mix all together) but use a different asset mixes by account when considering tax rules. Keep in mind that if you invest in US stocks in your TFSA, a 15% withholding tax will apply which you can’t get back. There are also brokerage firms offering USD accounts so you don’t lose money on currency exchange rates when dividends are paid. Here’s a list of brokers and if they offer US$ RRSP account:

Broker US$ RRSP
Scotia iTrade No
Credential Direct No
TD Waterhouse No
Qtrade Yes
National Bank No
CIBC Investor Edge No
BMO Investor Line Yes
RBC Direct Yes
Questrade Yes
HSBC No
Virtual Brokers Yes
Jitney Trade Yes

 

 

How Do You Find The Time To Manage Your Dividend Portfolio???

 

Once I have run my screener explained above, I use the Quadrant strategy to build my portfolio. I look at stocks that will add value and diversify my portfolio. The idea of building a quadrant system is quite simple: first, you select two characteristics you want to compare. Next, you compile the data for all your stocks with both characteristics. Once you have all the data, you simply have to position each stock according to their yield (on the X Axis) and their payout ratio (on the Y Axis). Here’s a quick example:

 

 

 

yield vs payout ratio

 

The key is to use four different quadrants (Div Yield vs Div Payout Ratio, Div Yield vs Div Growth, Div Growth vs Rev Growth, P/E ratio vs Income Growth) and cross referencing them in order to find the best stocks to add to your portfolio. This is an easy and simple method to use to build a solid dividend growth portfolio. I’ve actually written a step-by-step method to use the Quadrant Strategy in my recent book: Dividend Growth: Freedom through Passive Income

Is Dividend Investing for You?

 

If you want to eliminate management fees, and avoid getting overwhelmed by trading, you want to earn a constant stream of income all the while beating inflation;

Then, I think that dividend investing is a great starting point to manage your portfolio yourself.

 

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15 Comments   |  

15 Comments

Michel
October 29, 2012, 7:27 am

As usual, great post! For most investors, especially newbies, the simpler the better. Simpler does not mean incomplete..it means easier to implement and maintain, and build on it. Can I buy your book if I don’t have a Kindle? thanks

October 29, 2012, 8:52 am

I like to say that investing in high dividend stocks can be a tricky venture if you are not familiar with the ins and outs of the stock market.

Ken Long
October 29, 2012, 10:22 am

I still like trading and think following earnings trends can be much more profitable than dividend investing, but more and more I find myself interested in the S&P 100 dividend growth stocks and the potential they offer for an easy fairly safe investment, and the ability to write covered call options on them.

Mike
October 29, 2012, 12:38 pm

Hey Michel,

you sure can :-). you can download a free kindle viewer for pc, buy it on amazon and I’ll forward you the PDF copy (the pdf copy alone will be on sale just for Xmas… Amazon rules!)

Brian
October 29, 2012, 2:11 pm

Do you invest only in individual companies or do you have a portion dedicated to index funds (Ishares, vanguard etc) that pay dividends as well? Any thoughts on those?

Jake
October 29, 2012, 2:58 pm

Great article. I note that while TD Waterhouse does not have a US$ RRSP, they do have an automatic “wash the rate” program in your CA$ RRSP where they put sales of US stock into a US Money market fund and then take money out of that fund for stock purchases. Obviously you will have to convert some CA$ at first, but at least this helps to avoid the exchange rate changes (and the exchange rate markups).

Steve
October 29, 2012, 4:48 pm

I am with you on the dividend strategy. I am thinking about putting a few more dollars into the SDY – the US dollar aristocrat dividend ETF. Also want to look at the new Kraft foods.

October 30, 2012, 5:14 pm

I’m all in with dividend growth stocks as well. I like the security the dividends give me during a bear market. These companies also tend to be leaders in thier industries and I trust that they will continue performing well long into the future. They may not explode giving me astronomical returns like some small cap growth stocks but I am content aiming for a nice steady return year in and year out from solid safer companies.

October 31, 2012, 2:20 pm

There are other options. Be the bank, and hold someone private mortgage, can give you a much better opportunity. Investing in US real Estate with the right Team, hands free, stress free, can be another.
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November 3, 2012, 3:32 pm

[…] This is How You Should Invest Your Next 10K in Dividend Stocks @ The Dividend Guy […]

Andre
November 5, 2012, 9:33 am

I have been investing money from my corporation in US dividend stocks. As I cannot put this money through a TFSA or RRSP, do you think I would be better off sticking to Canadian stocks? Does the withholding tax make it impossible to earn a reasonable return on a consistent basis?

November 6, 2012, 2:40 am

I tried many strategies over time (swing trading, advanced options trading etc) and mostly I realized (besides losing money) that it was still like guessing from a crystal ball. All trades were based on a presumption that the stock should do this or that and in many cases it didn’t. Over time I found out that dividend investing is the strategy with which I am most comfortable and making profits twice; first in dividends, second in capital gains. Thus I am starting again building my portfolio with dividend paying stocks and compounding…

Mike
November 6, 2012, 6:22 am

Hello Andre,

Technically, you should put all your dividend US stocks in your RRSP account to not be impacted. if you want more info on how you can manage your portfolio with tax optimization, I explain how you should invest in my latest book(I have a full chapter about US dividend stocks).

cheers,

Mike

November 8, 2012, 10:18 pm

[…] Guy @ The Dividend Guy Blog writes This is How You Should Invest Your Next 10K In Dividend Stocks – What to do with your next […]

Fred K
October 25, 2014, 6:31 pm

First time to write on US REIT inside SDRSP account: any tax implication on dividend to report annually?

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