I’ve read a lot of comments about the potential dividend bubble for the past 12 months. Some investors are afraid to see so much money leaving bonds and money market funds to be piled into dividend paying stocks. Most investors are craving for revenue and dividend stocks are pretty much the answer to this desire… unless they continue to starve with their bonds and CDs paying less interest than I pay my kids!

But the fact remains: dividend investing is far more solid than a simple bubble created by a few retirees looking to receive a big fat check every month. While this investing strategy might look like flavor of the year since 2009, I can tell you it will continue to work out for decades to come.

Dividend Investing has Outperformed the S&P 500 Since The Very Beginning

You can do some research on the internet, the conclusion will always include the same fact: dividend growth stocks generate a better return than pure capital appreciation. In fact roughly 50% of the total stock market return comes from dividend payout. Trying to select pure growth stocks without dividends is like claiming you can ignore 50% of the stock market return in your portfolio.

But following a few case studies and buying dividend stocks for that sole reason would be a bit simplistic… even borderline stupid. It’s your money after all, are you here to make money or to gamble it on some geek studies?

Let’s dig deeper to see if there is a reason why dividend stocks are better than any others…

Dividend Payouts Require Cash Flow

By definition, a dividend is paid from a company’s after tax money. Therefore, the company must first generate sales, then earn sustainable profits, pay its taxes, save/invest for the future… and then pay dividends to its investors. There is no point of bleeding the company’s cash flow into dividends simply to please investors. Most companies paying a dividend because they make money and believe they will continue to do so in the upcoming years. Isn’t this the first reason why you would buy shares of a business in the first place: because your investment will generate positive future cash flow? A company paying dividends strongly believes in its ability to do so.

Dividend Growth Requires Profit Growth

Thinking that any stock paying a distribution is a good fit for your portfolio would be, here again, kind of ridiculous. There are multiple reasons to pay dividends besides having a sound balance sheet:

It may want to attract more investors, pushing the stock value higher.

It may be done to please a major investor who wants its money back.

The management might have overestimated their capacity to growth their business in the future.

The management might have underestimated competition.

Since picking just any stock with a dividend yield is not sound investing practice, the second step would be to pick a stock with a positive dividend growth for at least five years. You can become quite picky and require stocks with up to 25 consecutive years of dividend growth. They are called the Dividend Aristocrats.

A constant dividend growth requires, by definition, a constantly growing profit. Therefore, if you pick a company that increases its dividend payouts by 5% for the past 10, 15 or 25 years, chances are its profits are following the same trend. I’m asking you once again: wouldn’t you like to buy a company that believes whole-heartedly in its ability to generate future positive cash flows PLUS showing a strong history of profit growth? We are getting closer to what any investor would call a “perfect investment”, right?

Profit Growth Requires Sales Growth

It is true that a company could cut its costs for a few years and generate profit growth this way. This is a good solution to cut fat but management must make sure it doesn’t cut too much and jeopardize future growth.

This is why I like to combine both sales and earnings per share on the same graph. I want to make sure that both are on an uptrend. A company making more profit but showing a slowdown in sales or, worse, a decline will lift a red flag. On the other hand, a company with both sales and profits going up will definitely lead to more dividend growth in the future. This is how you can beat the market.

Here’s McDonald’s (MCD) example where sales, profits and dividends are growing while the payout ratio is decreasing (due to a bad year in 2008 where the payout ratio was much higher than previous years).

Sales Growth Requires Competitive Advantage

What’s the best reason why a company’s sales grow? The company has a competitive advantage. It can be a total leadership in its market, new innovative products, better locations, better process, strong branding, etc, etc, etc.

A company without a competitive advantage can’t really push its sales higher over several years. It will rapidly hit the ceiling and will have to cut on their costs to increase its profit. It will eventually hit them as you can’t continue to grow simply by cutting costs.

By selecting a dividend growth stock, you select a company with strong cash flows coming from increasing profits generated from more sales. Sales growth is often linked to a competitive advantage. Aren’t we drawing the picture of a perfect company for any investor by now?

Investing in Companies with Competitive Advantage is the Key in Becoming a Successful Investor

Regardless of your investment strategy, you will be investing for several years. Most investors have money allocated to investments for more than ten years. If you don’t want your face pressed up against your trading screen for the next ten years, you might want to select a more passive investing approach than day trading.

The best way to become a successful investor for the next decade is to find companies with competitive advantage. It is sometimes hard to define what kind of advantage is sustainable or not. This is why I focus on dividend growth stocks to make sure I pick businesses with all the qualities mentioned in this article.

With simple filters like dividend growth, dividend payouts, earnings per share and sales growth, you can easily find strong companies with a competitive advantage.

No need to do extensive research to know if a company is coming with “the next big thing”.

No need to hope for a homerun with your next pick; most of your stocks will be singles or doubles with dividends.

No need to track your portfolio on a daily basis, dividend investing is meant for the long term.

When you think about it, dividend stocks beat the overall market in general simply because they are rewarded by investors for their sustainable business model. A model allowing them to pay dividends for years.

A Word of Caution – Not All Dividend Stocks Were Created Equal

It’s not because a company shows strong dividend metrics that it is automatically a buy. For example, Radio Shack (RSH) was showing strong dividend metrics not so long ago and everything collapsed rapidly since their business model wasn’t a great match for today’s economy.

It is important to design a strong dividend growth model approach before picking anything from your filtered list. Don’t forget there are Dividend Traps to avoid!

Any respectful investor will tell you that you need a solid investment process if you want to be successful in the stock market. I’m definitely part of this category. I strongly believe in fundamental analysis to find the best stocks for my portfolio. I’ve created my own dividend stock analysis template and follow my investing rules religiously. But there are far more than simply ratios and financial data required to analyze a stock. The numbers will tell you a story, but there is a lot more to discover when you read between the lines.

Know What You Invest In

This investing rule has been made famous by Warren Buffett. According to his investment method, you should never invest money in a business model you don’t understand. This is also probably why he keeps most of his investments in “simple companies”. I must admit that it’s pretty easy to understand companies like Coca-Cola (KO), CN (Canadian National – Trains) and Heinz (HZN)!

When you know what you invest in, it’s easier for you to figure out if the company can continue to make a profit over a long period of time. For example, I own shares of Telus, a telecom giant in Canada. The market is relatively closed to newcomers and there are a lot of possibilities. I’m not a techno crack, but I do understand that the population of Canada is not 100% converted to the Smartphone yet and margins on such products are pretty good (especially with the super expensive 3 year contracts we sign!). I also own a few consumer sector businesses in my portfolio as I don’t have to figure out if people will continue to buy soft drinks or not!

Surprisingly, there are a lot of things you can understand from your own perspective. When you mix what you learn from work and from your day-to-day life as a consumer, you have a lot of data to analyze. Most of it can be used to improve your knowledge of a few companies.

Plan Your Investment Return Based on Dividend Yield

Another thing I like about dividend investing is the fact that you can plan a part of your investment return ahead of time. If you treat your stock as bonds instead of equity, you will find retirement planning a lot easier. Let me explain my theory.

Within the next 12 months, 2 years, 5 years, it’s pretty hard to determine the future price of a stock. There is tons of news that can influence the price of your stock. However, there is not much that can influence the dividend payment.

Once you have selected a strong dividend payer (with a growing EPS and a low payout ratio), chances are that your dividend payment will only increase in the upcoming years. This part of the equation is fairly easy to plan for when you look at long time dividend payer.

In my portfolio, I can be assured that companies such as KO, JNJ, CVX, BNS, NA, INTC, T will continue to pay their dividends for a very long time. Their payout ratio is low and their dividend history is impeccable. Unless there is a huge catastrophe, I can plan on receiving my 3-4% dividend yield for several years. I don’t need to know the value of the stock per se; I only need to know how much I will receive in dividends. If the company continues to keep a good ratio, its valuation will come back to par (or even higher) over the long haul; exactly as bonds come back to their par value before maturity.

Then again, if you understand the business model you invest in, you won’t have to worry about the dividend payouts!

Follow the Buzz? Only if You Get it

I’m not too keen on following the market flavor of the month. For all kinds of reasons, good or bad, many investors start to invest in similar stocks in the same sector. We saw it earlier this year with the food industry. I personally picked the techno sector over the past two years with investments in Telus, Intel, Seagate Technology and Apple. I like the buzz around techno stocks because most companies have so much cash in their accounts, they don’t have any other choice but to pay bigger and bigger dividends! I’m expecting Apple to turn into another Microsoft. The growth won’t be astronomical anymore, but the dividend will increase on a steady basis.

Riding a wave while it goes up is always fun. But there is a big risk the wave crashes while you are still on top of it. This is why it’s important to understand why there is a buzz around a sector and if it’s worth it to invest or not. I’ve riden the buzz around oil income trusts in Canada back in the early 2000s. I made a lot of money and, fortunately, I cashed out my investment to buy a house in 2007, right before the crash. There was a huge negative buzz around banks in 2008-2009. Those who analyzed the situation right saw that Canadian banks should not be penalized by that buzz. They made a lot of money!

The reason why I bought Apple this year is also because there is a negative buzz around the company. I believe that with their resources and cash, they will bounce back. I don’t expect the stock to go as high as $800. But I expect it to increase its dividend on a yearly basis!

Finally, Know Why You Are Investing

I think that knowing why you are investing is very important. Some do it for fun because they like the feeling of trading. Others do it because “it is the thing to do when you have money”, they should consult a professional to make sure they are doing the right thing! There is also a big difference if you invest to generate a source of income than if you are in your 30s and trying to build a big nest egg. Beyond the numbers, the reason why you invest in the first place will dictate how you will manage your portfolio and if you will make money or not!

Disclaimer: I own shares of KO, JNJ, CVX, BNS, NA, INTC, T, STX.

If you have been following me for a while, you know that I’m not too much of a technician. I like the fundamental approach and make good use of timing in sector while investing through asset allocation. When it’s time to talk about technical analysis, I’m not quite sure what to think about it.

As for my personal use, I simply consider technical analysis when I’m about to buy a stock. I check a free report called Trend Analysis giving me a few indicators with a moving average. It basically tells me if the stock is on a roll or in a slump. Besides that, I don’t use any other technical metrics.

Moving Average, Fibonacci, Elliott Waves, Candle Sticks and the Others

There has always been a great fight of ideas between fundamental investors and technical analysis practitioners. On one side, fundamental investors read financial statements and look at “classic ratios”. If you follow my stock analysis template, you are pretty familiar with this investing method.

The technical analysis approach requires statistical data and multiple graphs. According to this investment technique, you should be able to determine the trend of a stock by the analysis of its past movements. You should not only be able to tell if the stock is going up or down, but you should also point out the entry levels (bottoms) and exit levels (summits).

Technically, this  means that one could invest in a stock when it’s down and sell it when it goes back up and know approximately when to do it. It’s like reading the stars or doing storytelling but with the stock market.

But they don’t have to read the CEO’s palm to find the stock’s future, they use numerous statistics along with various graphs. You may have heard of moving averages, Fibonacci ratios, Elliott waves, Japanese candle sticks. I once wrote a piece about moving averages and the results are quite interesting (you can read how moving averages work for stock trading). I was shocked to see that this method seems to work but still, I’m not a believer.

Are They more than Believers?

What I find fascinating about technical analysis is not the trading process by itself. To be honest, I like math but doing technical analysis is just too much time to stare at graphs for me. However, what I truly find fascinating about technical analysis is the number of believers.

Everywhere I go, I meet with people who believe in this investment technique. They talk to me about the method to find shapes and trends within graphs. They use moving averages, Fibonacci ratios, Elliott waves, Japanese candle sticks and sometimes Shaman’s magic powder to throw at the screen.

There are so many metrics to follow that each investor builds their own system. They test and try and look at past graphics to see how it goes. But the thing is; I find it pretty easy to explain what already happened. Where were all those people when the sky was falling in 2008?

Can You Really Predict Stock Prices With Graphs and Stats?

Take the method you want, take the graphs you need, but please, tell me something that I don’t know. Maybe it’s just me and I don’t know enough about it, but let me ask you: how come all technical analysis traders didn’t become filthy rich in 2008?

I mean, it was quite hard to predict such a crisis if you were a fundamental investor. However, if you follow trends on the stock market, you could have to be able to predict trends, right? Isn’t it the ultimate goal of technical analysis; predict trends following stats and graphs?

I don’t need someone to explain me what happened on a graph, I need someone to explain me what will happen based on the same graph! You can find technical analysis believers by millions but only a handful of people made a killing in 2008. I’m not even sure if those guys were heavy technical analysis fans on top of that.

This technique wasn’t able to establish a solid ground during the most volatile market, this is why I’m not a believer. On the other hand, fundamental investors like me found great deals during that hectic period. Over the following years, we were able to make a lot of money based on real reasons such as profits and sales growth!

So I’m asking you; do you like technical analysis? Do you do it? How successful are you?

Investing is not only about making money. In an ideal world, we all hope to pick the right stock at the right time and sell it for a profit. This always gives us a good story to tell and we wish we had the same story for each stock in our portfolio. Unfortunately, investing is a lot more complicated than simply picking strawberries during a warm, sunny day with your family.

I started my investing journey ten years ago and made some great moves and some stupid ones too. Over the years, I’ve tried to identify my own challenges, my own investing pain and try to solve them the best that I could. I’m sharing my experience here and hope you will find hints to solve your own investing pain through my story.

Right Time to Buy or Sell

Is there anything more complicated than knowing when is the right time to buy a stock or get rid of it? Building a list of prospects using stock websites hasn’t been a problem for me since my friend and I built our own Excel system that grabs crucial metrics in our investment model from different sources and puts them together. So I don’t have a problem building my watch list, but finding the right moment to buy and sell is more complicated.

When you buy, you want to make sure you do it during a slump because you hope for a quick profit. The point is to not sell the stock right away, but a quick paper profit makes you feel good about your trade, right? When selling the stock; you are stuck in a dilemma; the companies have generated a lot of profit, should I sell now or wait and make more profit? Greed comes into play and it’s always hard to make a decision.

I’ve decided to solve this problem with “neutral” metrics added to my decision. When I purchase a stock, I don’t worry too much about the timing (besides when I seize occasions like AAPL recently). I’m thinking that I’ll be holding this stock for a few years at least so the exact timing of the transaction shouldn’t matter too much.

When selling a stock, I base my decision on the fundamentals that made me buy the stock in the first place. As long as my required metrics are showing in the financial statements, I stick to it. The day it disappears, the stock is not part of my portfolio.

Buying Foreign Dividend Stocks – Tax Issues

Buying foreign stocks is not always easy. First you need more information on the company prior to trading. You want to make sure you understand its economic environment as you understand your own country. Then, currency fluctuations are a pain in your total investment return. Imagine if you pick a stock rising +10% but in a currency 15% weaker than yours during the same time… You lose 5% on a “good trade”. On top of that, you have to make sure that you don’t get hit twice by the tax guys.

In order to solve this problem, I’ve made extensive research for both Americans and Canadians investors. I’ve compiled several sources saying the same thing about different foreign investments. I wanted to keep my portfolio simple so I quit the idea of buying anything else but US and CDN stocks. I think both markets have enough to offer that I don’t need to go elsewhere to find a good stock. Plus, the tax implications regarding dividends is much easier to understand when you are playing with only 2 markets!

I’ve detailed my research and how to optimize your foreign stocks in my book; Dividend Growth – Freedom Through Passive Income.

Manage my Asset Allocation

When I look for a new stock to add to my portfolio, I sometimes feel like a bee going from one flower to another. I don’t necessarily keep my asset allocation per sector in mind. I set my global asset allocation a long time ago: 100% stocks. This was the easy part. However, I’m still struggling when it’s time to diversify my portfolio by sector.

When a sector is doing well, chances are that you will find several interesting stocks showing similar metrics. Since I always start my stock research within a pre-screened list, it happens that I have a concentration of a few sectors. For example, when you look for strong dividend stocks in the Canadian market, most of your screeners will show you 4 – 6 banks (RY, CIBC, BMO, TD, ScotiaBank and National Bank) and 4 telecom companies (BCE, Telus, Rogers and Shaw). If your target is to buy 10 different stocks, I don’t call buying this package a good asset allocation mix. It’s true that they have all performed well in the past 10 years but it’s also true about the banking and telecom industry in Canada in general. If the banking system would be hurt by a potential Canadian housing bubble, I don’t think holding 4-5 banks in your portfolio would be a good idea.

But then again, it’s easier said than done. I know I my affinity for techno stocks, I currently own INTC, STX, AAPL and Telus could almost count as a techno stock. This is definitely too concentrated but I’m torn between a sound asset allocation and the fact that I find so many good investing opportunities in this sector!

As you can see, I haven’t resolved my asset allocation pain. I guess a good idea would be to build a virtual portfolio  with a  sound asset allocation and try to meld it with my real investment strategy.

Finding Time to Take Care of My Investments

Time is probably another big issue for most investors. We all have a few minutes to look at the market daily and see if our brokerage account went up or down. But how many times do you actually read the financial news, check out financial statements and make sure your investments are solid?

The fact that I work in the financial industry helps me a lot to combine both my job and my passion for investing. Therefore, each time I educate myself for work, I become a better investor at the same time. But if I didn’t work in the financial industry, keeping track of my investments would be quite a challenge. I would be interested in hearing about how you do it, do you use trading alerts? Are there any specific websites or tools helping you to manage your portfolio?

What about You? What’s Your Biggest Investment Pain?

I’m currently working on additional resources to be offered on The Dividend Guy Blog and I need your help with this. Since I don’t want to work for nothing, I want to know what your biggest investment pain is? What is the #1 thing lacking in your investment strategy to make you happy and make sure you are making money from your portfolio? Thx for sharing your thoughts!

You may not know this yet, but I’m a big hockey fan. Being raised in the tradition of the Montreal Canadiens, I have followed my team religiously since I was 12… that was when they won their last cup…. Hahaha!

Buying stocks is always the fun part when managing a portfolio. You go on the “hunt”, you find an interesting stock, do more research about it and get excited. You buy some shares and feel proud about the catch of the day. But when it comes to managing your portfolio, i.e. should you buy more of this company or should you sell it? It becomes a little bit harder.

Today, I’m going a little bit off the traditional post format where I suggest following strict metrics and a proven investment process (read about mine here). I wanted to share with you how you can truly and successfully build your portfolio and manage it to see each of your stocks like a hockey player. Have you ever dreamed of becoming a General Manager? Here’s your chance to see if you would be successful! As is the case with a hockey team, it’s impossible to build your portfolio with only Crosbys and Stamkos; you will have 1^st liners but you will probably end-up with some grinders too. Everybody can’t score on the same night .

Where do You Start? With Your Goalie !

As is the case with a real hockey team, your goaltender is your wild card. An average goalie can still do the job if you have a strong team in front of him. Also, you may have the best goaltender ever, if you can’t score, you will still end-up losing 1-0.

You guessed it; your goalie is your fixed income. Bonds are there mostly to “limit” the damage but can’t ride your portfolio to very high investment returns. I’m the kind of GM who thinks that offense is the best defense and this is why I don’t have bonds or CDs in my portfolio. I would rather leave my goaltending spot to steady dividend stocks such as Johnson & Johnson (JNJ) and Coca-Cola (KO).

How to Choose Good Defensemen

A good hockey team has 2 types of defensemen: defensive and offensive defensemen. While the defensive Def are doing a similar job as the goalie, offensive Def are very important as they will help you in your transition movements and become crucial during power plays.

You have already heard about “defensive stocks”, right? These are your defensive defensemen. No matter what happens during the stock market, they will always lose less during a recession but will lag during a bullish period.

Defensive stocks in a good sector can become offensive defensemen. The telecom and the banking industries are fairly protected and stable in Canada. You have 4 major players in the Telecom arena (BCE, Rogers, Shaw Communication and Telus). These stocks are part of a relatively secure environment which provides them with the title of “defensive stocks”. However, have you noticed how some of them have surged over the past years?  Just look at the Telus graph over the past year:

+22% in 12 months… does it sound like a very defensive stock? This looks more like Erik Karlsson to me! Stocks like these are probably the best card in your hand; stable, reliable and ready to burst at the same time! There is a reason why the Canadiens are doing so well this year so far. This reason is Markov (10 pts in 16 games) and Diaz (12pts in 16 games). Not bad for defensemen, huh?

I Have a Few Second Liners

As is the case for recruiters in the NHL, most of our picks will end-up as second or third liners and only a few of them will rank as “potentially the best player on the team”. The point when selecting a young player is to select a forward that has potential and that can fit into your team. You must find key characteristics that will help your team win more games.

The “drafting” selection is similar when buying stocks. You always hope to buy the next stock that will rule your portfolio but in the end, if you concentrate on selecting stocks that are able to contribute to your overall returns, you will do a good job.

For example, Chevron (CVX) and Husky Energy (HSE) are part of my Dividend Holdings. They are mature companies running a well established business in the oil industry. They should provide a steady dividend all the time. However, since the oil sector moves rapidly; their growth potential is higher than a regular defensive stocks such as KO. They will be scoring from time to time but they won’t probably become my best player or game changer either.

Looking for a Power Forward

The term “power forward” in hockey means a big, strong player able to shift towards the center of the ice and place himself in front of the goalie to score important goals. They are able to bring the puck with them and carry the team on their shoulders.  The more power forwards you have on your team, the more difficult it is to play against your team. Unfortunately, power forwards are rare and hard to discover before they evolve.

For the past 10 years, a good example of a power forward stock would be Canadian banks. Who would have predicted back in 1999 during the techno bubble that the best performing stocks for the next 10 years would be old grinchers with their techno retarded banks? Over the past recessions, Canadian banks have proven themselves as incredibly strong and productive stocks. Their balance sheets are stellar and their dividend yield impressive. They have consistently been scoring over the past 10 years and represent an important strength in anybody’s portfolio. I have shares of BNS and NA.

Looking for a Star Player?

Each team tries to get their hand on the next Gretzky, Lemieux or Crosby. Obviously only a few teams can count on a huge star like this. And, sometimes, those we thought could be stars end-up being normal players. I don’t know if you have looked at Ovechkin’s stats for the past few seasons but after racking up over 100 points three seasons in a row, he has dropped to 85, then 65 and he currently shows 10 pts in 15 games…. But this is not the biggest flunk in the history of hockey, far from it. I’m more thinking about another Alexander… Daigle (Sorry Ottawa fans!).

Searching for an all-star stock is always risky. You aim for huge returns but might end-up with close to nothing. In past years, I’ve tried my luck with RIM, PDN and VNP. So far, all three stocks look more like Scott Gomez today than anything else. They were very productive and impressive at one point but quickly faded away into mediocrity.

I’m currently trying to make some money back with a ride on Seagate Technology (showing over 30% return in my portfolio) and Apple (hoping to see it back at $700 in a few months). I’m taking two important risks right now in my portfolio and I feel I can do it because I have great stocks to compensate. My core is solid and, unlike NHL GMs, I don’t have a salary cap and can keep all of them .

Trade / Contract Buybacks – It’s the Same Thing With Your Stocks

When a player doesn’t fit in as you thought it would or doesn’t perform, sooner or later, a GM will trade this player or, now that he has the option, buy back the contract. He has taken a loss, but his team will be better without that player anyways.

This is how you should feel about an underperforming stock. “Trade” it for a better performing stock you have on your watch list or simply sell the shares, take the loss and wait to make a better move in the future. Hockey has become a business and it’s all about numbers, your investment portfolio is all about numbers as well! Never fall in love with a hockey player… and never fall in love with one of your stocks!

Back at the beginning of 2012, I played Nostradamus and tried to call the shots on a bullish versus a bearish market for 2012. It appeared that I was right (read my prediction here) and I even called the bluff on the “potential” dividend bubble. So, I thought it would be interesting to look at what we can expect in 2013 for dividend investors…

Bullish or Bearish for 2013?

As I did back in 2012, I started my analysis by looking at cold, hard facts. It can be exciting to think that another Black Swan event is coming and that the stock market is going to collapse but I’m leaving this job to the media and I will concentrate on a few graphs coming from the US.

In the first chart, I am looking at the employment creation (in thousands). After a slow summer, the US employment market seems to have picked-up steam and should continue to show some strength. Since 70% of the US GDP is generated by its consumers, you want them to have a job! And so, employment creation is the first step for a healthy economy. I am also happy to see that Sandy didn’t hurt the employment market too much.

It’s one thing to create jobs but it’s another to make sure that all Americans keep their existing ones as well! The unemployment rate has been dropping for the past 6 months which is great news.

Finally, new home construction is another strong indicator to know where the economy is heading. In order to be considered at “full speed”, the US market should generate an annualized rate of 1 million new houses. We are currently hovering right under the 900,000 bar which is also another great sign.

As you can, the general economic environment is not booming but is heading towards a brighter future. I think that the consumer sector will benefit from this relatively strong base. Stocks like Kimberly-Clark (KMB), Procter & Gamble (PG), Campbell Soup (CPB), General Mills (GIS), Kellogg (K), Heinz (HNZ), Safeway (SWY), Walgreen (WAG) should perform well in this environment.

Where Will You Fall After The Fiscal Cliff?

(Please note that this article was written on December 27^th and no Fiscal Cliff arrangement had been concluded at that time)

At the time of writing this article, no Fiscal Cliff arrangements were made yet. One way or another, I truly believe that we will see some kind or arrangement. Chances are that dividends are going to be taxed more in the future.

While it seems to be the end of the world today, please keep in mind that US dividend used to be taxed at a much higher level not so long ago. It seems hard to imagine, but back in the 90s (and early 2000s), dividends were taxed a lot more. It is true that we saw several companies starting to pay or increase aggressively their dividend payouts once the tax breaks came in. However, there are companies (notably dividend aristocrats and dividend champions) that have always been increasing their dividend.

This is why I’m not too concerned about the fiscal cliff and the end of the dividend tax break. The main difference is that we will be more limited as investors in the choice of dividend growth stocks. While investors using tax sheltered investment accounts won’t be affected too much by the tax increase, the decision to pay dividends by companies will be affected to some extent.

In fact, there are several companies paying dividends to keep investors’ interest in their stocks (notably major mutual funds since they have several clients that are invested in non-registered accounts). This is why I believe that the number of companies increasing their dividend (or paying any dividend at all!) will be affected by the fiscal cliff.

You can see this impact when you look at the futures on the S&P500 expecting a drop in dividend payouts. There are also many companies that paid a special dividend in 2012. Don’t expect that to happen again in 2013!

The key to success will remain in choosing solid companies with a solid dividend growth history… oh wait! This is what I have been doing anyways .

Where Will The Dividend Growth Be?

The first thing I’ll tell you is that I’m convinced that the US stock market will do better than the Canadian for a third year in a row. The economy is more diversified and seems to be on a good trend. US companies can count on emerging markets growth as many of them operate more than 50% of their activities outside their main country (which is pretty rare to find in Canada). The other reason is that the most profitable economic sector of the Canadian market, the financials, will probably be flat in 2013. The housing market is slowing down and the interest rate acts as a Damocles sword over their head. I’m pretty sure that Canadian banks won’t go through their best year in 2013!

The thing that could “save” the Canadian economy would be a boom in the oil industry linked to a rolling global economy. If you are that optimistic about Europe and China, you can invest your money in Canada before the US but, if you are like me, your next stock picks might be on the US side.

Personally, I’ll be looking at simple and diversified business models with a long dividend growth history. I won’t ignore the impact of the fiscal cliff and will be looking at stocks with a longer dividend growth history. I might run a filter to look at the past 10 years to make sure I pick stocks that will continue to increase their dividend and not simply follow the investing trend.

It’s not a coincidence that I have picked companies such as Abbott (ABT), Campbell (CPB), General Mills (GIS), Heinz (HNZ), Johnson & Johnson (JNJ), Kellogg (K), Kimberly-Clark (KMB), Mattel (MAT), McDonald’s (MCD), Procter & Gamble (PG), Safeway (SWY) and Walgreens (WAG) to be part of the best 2013 dividend stock picks on the US market. I truly believe that consumer and health basic products will be good sectors to invest in 2013.

If you want to get all my stock picking ideas for 2013, check out Best 213 Dividend Stocks. I’ve compiled 20 top US dividend stocks and 10 Canadian dividend stocks for 2013.

What do you think? Where will you put your money in 2013?

Over the past two weeks, I’ve been looking at the top dividend growth US stocks and the top dividend growth Canadian stocks held in the biggest dividend ETFs in terms of market cap. I have explained that by looking at the top dividend ETF holdings, you can build a very interesting list of potential stocks to add to your dividend portfolio.

I started with 2 simple investing principles to build my theory:

#1 Portfolio managers are professionals who have access to more time and resources to build their portfolio than the average investor.

#2 The fact that ETF behemoths maintain a position in a stock and keep buying it ensures a certain level of demand, read value, for this stock.

Based on these very same principles, an investor could think: why should I bother picking my own stocks when I can buy a dividend growth ETF?

This is a legitimate question and depending on which kind of investor you are, ETF investing could be very interesting. Let’s take a deeper look into the world of dividend ETF investing…

#1 Loss of Control

The first obvious reason why you would like to keep your dividend growth portfolio instead of picking a dividend ETF is to remain in control of your portfolio. When I looked at the Canadian dividend ETFs, I found many stocks that I would not personally own. But if I buy the ETF, I won’t have a choice but to buy the package.

The argument that portfolio managers are professionals and have more resources doesn’t mean that they are better than the market or the average investor all of the time. In fact, they can also develop the tendency of believing that they saw something nobody else saw and pick a relatively bad stock thinking it will bounce back. If you like to know what’s inside your portfolio, dividend ETF investing might not be the way for you.

#2 Loss of Dividend Growth

There are 2 factors that affect negatively dividend growth within an ETF:

#1 TheMERaffects your overall dividend yield

#2 ETFs are separately managed stocks and may not follow individually held stocks’ dividend policies

For example, during the last crisis back in 2008, many dividend ETFs reduced their dividend payouts while individual companies didn’t. Many stock holders didn’t feel that payout reduction since many companies kept their dividend as is during the crisis.

So if you compare your chances of increasing your dividend payout over a long period of time, dividend ETFs may slow down your performance. That is, conditional to picking the right individual stocks!

#3 Loss of Control over Dividend Payouts

When a dividend is issued, there are basically three actions you can take:

#1 Cash the payout as a revenue stream

#2 Use the dividend payout to buy another stock

#3 DRIP and increase your holdings in your stock

I personally use the second option right now as I want to build a bigger portfolio with more stocks. Eventually, I will use DRIPs to increase my existing positions once I hold enough stocks in my portfolio. I would not have this kind of choice if I was going to buy dividend ETFs as the payout will be paid “in bulk” and not for individual stocks. So I couldn’t increase my position in KO while cashing my STX dividend payout. I would have to either increase my position in the ETFs or cash my dividend payout.

When ETF Investing Could Be Very Interesting

What I don’t like about dividend ETFs is definitely the lack of control over the core of the portfolio. As individual investors, I think we all think we can beat the ETF by our own investing methods. I know, it’s probably not right, but the psychological aspect of investing is often stronger than the rationale!

The more I think of ETF investing, the more I look towards a different portfolio model. What if you could build a core of ETF INDEXES (not dividend) and add dividend growth stocks around it to boost its yield?

Index investing provides a huge advantage when compared to stock picking and it’s called diversification. The fact that you are mixing a growth (index) strategy with a value (dividend) method should ensure a smoother investment return year after year.

The way I manage my dividend portfolio is getting closer to this technique right now as I’m buying indexes with my dividend payouts until I have enough cash to buy another position for my portfolio. Once I have all my stocks picked, I might start building a core in indexes while my dividend stocks continue to pay me.

What do you think of this investing technique? Have you ever considered mixing indexes and dividend stocks in the same portfolio?

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.

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:

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:

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.