Four years ago, I bought this blog. This was my first move towards dividend investing. I started investing back in 2003 but my first dividend stock was bought in 2010. Over the past four years, I’ve worked on building my own investing philosophy (you can read about it here). My investing model didn’t appear overnight and it was the result of a long process.
What I really like about investing is that you are never done learning. There is always a new situation that will generate new results in your portfolio. After four years of dividend investing, here are the most important investment lessons I’ve learned:
#1 I Love Receiving Money in my Account
I guess the biggest difference between dividend investing and all other strategies is the fact that each month; my cash account grows bigger. Receiving dividend payouts each month is a great feeling. Since I don’t lose any time tracking my dividend dates, I sometimes open my brokerage account and find $20, $50 and up to $171 once! Since 2010, my dividend payouts have never stopped growing:
In 2014, I expect to receive almost $1,500 in dividends on a $50,000 portfolio. This equals a 3% yield. It is a modest amount so far, but it will greatly increase over the years to come. It took me two years to make the full transition from my previous positions to a 100% dividend portfolio this is why the yield is still relatively low.
Besides the fact that it’s fun to receive money each month, I also appreciate this extra cash flow so I can buy more stocks. I usually build my dividend payouts up to $500 to buy an index fund and wait until I have about 10% of my portfolio available to buy another position. For example, I’m now waiting for my annual RRSP contribution of $5,000 in January to buy my next stock. I will definitely add all remaining cash in my account to this transaction.
#2 It’s Easier to Follow Dividend Stocks
I used to trade heavily on oil and other resources stocks. There is a lot of money to be made in these fields but it also requires several hours of work and daily check-ups. I still spend several hours before buying a dividend stock, but once it’s added to my portfolio, I don’t have to check my position every day… not even every week!
When you buy a dividend stock, you usually buy a sound & healthy companies. Therefore, following quarterly results is usually more than enough to make sure one stock doesn’t slip through the cracks and start rotting.
#3 Don’t Chase High Yield
I recently wrote a case against high dividend yield but I must admit I learned my lesson the hard way. I bought a covered call ETF back in 2011 (ZWB). ZWB is a covered call ETF that follows the six Canadian banks. Over about a year, I lost almost 9% on that trade. Mind you, when I bought ZWB, the dividend yield was… roughly 10%.
Today, the ETF is up 15% since its inception in 2011, while the worst bank during this period is CIBC (CM) at +23% and the best are TD (+54%) and NA (+50%). Plus, the ETF now pays *only* 4.61%.
The lesson to learn from this is that high yield investments always carry limited growth potential and/or higher risk.There is a reason why you get a higher yield and it’s not because Santa Claus exists!
#4 Dividend Growth is better than Trading Regularly
One of the reasons why I switched to dividend investing was to reduce the time required to manage my portfolio without affecting its performance. It turned out that I’ve improved my performance and reduced the time spent managing my stocks.
But I had to face my old demons; a part of me wanted to trade more and use capital gains to buy other companies. The best part about dividend investing is you don’t always need to sell your stocks to benefit from growth; the dividend payout increases too!
When I bought Telus (TSE:T) back in 2011, the dividend paid was $0.26 per quarter per share. Now the current dividend is $0.38 per quarter per share. That’s a 46% increase over just 3 years! I could have sold the stock and cashed out a healthy profit, but the truth is that Telus pays a 5.6% dividend yield based on my cost of purchase. In a few years, I’ll be able to add a new position to my portfolio only by cumulating the dividend payouts. This means I won’t have to dip into my pocket to grow my portfolio!
#5 Yield Doesn’t Matter if you Select the right pick
At first, I used to select only companies paying over 3% in yield. It was my way of identifying “good dividend stocks” amongst other factors. I used to ignore lower yielding companies because they were simply not good enough for me.
I quickly made my first exception and selected Coca-Cola (KO) at 2.75%. I knew KO’s dividend would reach over 3% in a heartbeat due to its dividend growth policy. It did and I was encouraged to dig further into similar yielding companies.
The truth is that I found several gems among low dividend yield stocks. Among them, I bought Disney (DIS) with a 1% dividend yield now showing a +40.18% in my portfolio. I also bought Apple (AAPL ) with a 2.25% yield (back then) now showing + 39.96%. More recently, I bought Gluskin & Sheff (TSE:GS) at 2.50%. The stock is already +11% before dividend payments this year. The dividend yield is not the most important metric when you select a dividend stock. Instead, I look for companies with the ability to increase its payout consecutively for the next 10 years and beyond.
#6 Patience is the Most Important Investor’s Asset
During these four years, I’ve bought several stocks that didn’t go into the green right away. In fact, both Chevron (CVX) and Johnson & Johnson (JNJ) stagnated a while before I realized any profits. I bought JNJ when there were quality control issues causing important expenses. Let’s just say there wasn’t any hype around the company at that time.
But since then, JNJ has soared boosted by great results in 2013 and 2014. Sometimes you get lucky and your stock keeps going up the minute you buy it. But most of the time, the result of your trade is not instantaneous. On the other hand, patient investors will receive their rewards sooner or later.
I’m excited to finish 2014 with my current portfolio as things are going very well for me right now. I also know that will learn a lot more in the upcoming years as it will be interesting to see how my portfolio will react to a bear market although I don’t think we will see it any time soon. I’m not stupid either; there’s always a drop in the market after such a boom.
Tell me, what have you learned from dividend investing in the current bullish market?
I have learned that owning large dividend paying stocks during the crisis of 08-09 made me feel like hanging on until the crisis would be over. I didn’t know when we’d get out of it, but I knew that my stocks would eventually come back to even higher levels.e.g. cdn banks.Good blog Mike!
Hey Mike, The joy of Dividend Investing is, well joy. It’s all the things you said and 30 years in, I wouldn’t change a thing. Have a great day.
this is probably the best benefit of holding dividend stocks: always receiving money no matter what happens on the market!
Hey Brye Guy,
I look forward to celebrate my 30th year as a dividend investor… I’ll be retired at that time, thx to dividend payouts!
The Passive Income Earner
I have also put more focus on good dividend growth like 10% average. There is a big difference between a company that increase their dividends by 1 cent just to be a dividend grower and a company that increases it by 10%.
What I have also learned is to hold US stocks as a Canadian. The RRSP account is the best to do so.
Excellent guidance for those just getting the diviend message. Given your preference for growth stocks even at the expense of low dividends, is there a place for growth-only stocks such as PLS? And what is your take on TPH and NIF.UN, both yielding 9 -10%?
Great points, can’t agree more. Dividend investing prrevents ppl from trading too much. That’s one of the biggest mistakes that investors make.
I just took a quick look at PLS. Some fundamentals looks good (dividend yield, payout ratio, revenue growth) but the high PE ratio and hectic EPS trend are raising a red flag. Can you tell me more about the company? maybe there is a good story here and it’s a very solid stock to hold…
I don’t like companies such as TPH and NIF.UN: losing money (for TPH) and no dividend growth for a long time; I’m not this kind of investor.
Great points. I can relate to all of them. Dividend stocks are much easier to follow because of the dividend. I am constantly looking up when the next pay dates are and if any increases are coming and if no increase I look to see why not. Plus when dividend roll in they feel like little Xmas presents time and time again nestled into your account.
These points are great. #1 in particular expresses why I love DGI. Just checking on my porfolio and realizing I’m now $X richer because of dividends? An amazing, almost addicting feeling. Wouldn’t trade it for the world.
Dividend Family Guy
#6 is probably the most important. Rash decisions in investing and your personal life often lead to mistakes and loss. I know that one all to well.
All great points to learn for any dividend growth investor. You can see from my portfolio that I do not chase yield at all, don’t trade frequently and most of all I have patience even when my entire portfolio dropped like a hammer in 2008/9 I did not sell. Thanks for sharing.
Dividends are great. But tripling the return through an active sale of covered calls of dividend stocks is even better.