Since returning from our year-long trip across Central and North America, my wife and I have cut down on our TV time. We cut the cable and rely only on Netflix for the few hours we spend per week watching TV. We would rather do other things during our evenings like playing Scrabble or reading. I’ve found it keeps our brain fresh and I have more energy throughout the entire day.
On Tuesday night, we were having a very intense Scrabble game. I just started the game with a 7 letter word on my second turn. My wife was ready to fight back and took a pause to think about her next word. While I was waiting, I received a very disturbing email. It was talking about selling all your dividend stocks in 2014 and about “member of the dividend investing cult.” This email came from Rob Carrick, it was about his “Carrick on Money” column at the Globe & Mail.
What was the email really about?
I enjoy reading Rob’s column from time to time. He is part of the financial journalists making sense (there aren’t lots of them, honestly). He discussed the decision of another blogger I enjoy reading in the Canadian personal finance field; Boomer & Echo by Mary & Robb Engen. In this article, Robb explained his returns three years after leaving the dividend world for the ETFs universe.
In 2014, Robb decided to sell all his dividend stocks and invest into 2 diversified ETFs: Vanguard’s VCN and VXC. In other words, he left 24 stocks in the world of equity as a whole. From his article:
“Now I only log into my online brokerage when I’ve added new money and need to make a trade. Indeed, my four-minute portfolio is a breeze to manage. I own more than 10,000 stocks from around the globe so if one stock, one industry, or even one country is having a bad month I’d barely notice.”
I read Robb’s article with great attention since I like to understand another’s point of view on important matters. This is another way to keep my brain fresh! While Robb’s investment returns are solid (14.06% in 2017 and an annualized rate of return of 12.26% over the past 3 years), I still disagree with both Robb (Engen) and Rob (Carrick).
Where Mr. Carrick is completely wrong
I must admit that I really ticked reading Carrick’s column rather than the blog he was referring to. While Boomer & Echo reported his results in good faith, Mr. Carrick used that article and twisted it into a few sophisms.
First and foremost; dividend investing isn’t a cult, it’s a strategy. In fact, it’s not only a strategy; dividend growth investing explains more than 50% of the total stock return. I’m sure you saw this kind of graph, but I’m going to post evidence here for the most skeptical among us:
The longer you stay invested in the market, the more dividends take an important part in your overall return. There are multiple evidences that dividend grower beat the market on a systematic basis too. When you think about it; this is pure logic. A dividend is paid from the company excess profit. If a company is able to grow this payment year after year, there is a good chance that profits are following a similar uptrend. Therefore, it makes sense to think that this stock is also going up, not just the dividend.
Second, using three years of returns means nothing. In order to prove it, I will post my return in a few seconds just to show Mr. Carrick that I’ve been more successful over the past 3 years than Mr. Engen. Am I a better investor? You can’t say that over 3 years. I’ve already been investing for 15 years and will most likely manage my money for another 50 years or so. Therefore, 3 years of returns in 65 years of an investor’s life isn’t much. In fact, it is only 4.6% of your total investor life. Would you make important decisions with only 4.6% of the information on a topic? Yeah… me neither.
Unfortunately, we will be able to compare Mr. Engen’s return with mine or other investors only in 20 years from now. During this period, our portfolios will go through various economic and stock market cycles. We will be a in a better position to determine which portfolio is able to navigate through the market seas. 3 years? Hey! My 5 years old son could have picked stocks based on the company’s logo and beat me!
Third, comparison and benchmark are everything. In his article, Boomer & Echo compared his return to the Canadian Dividend Aristocrats ETF: CDZ. I would have preferred to see his previous portfolio (24 dividend stocks) and see how they would perform with no changes. It would have been perfect, but the whole goal of dividend growth investing is to keep your holding as long as possible. Therefore, limited trades would have been made during that time.
While we could debate for years on which benchmarks should be used, I think this proves my point that ETF investing isn’t flawless. The point of stock picking is to obviously avoid holding bad companies that fit some ETFs rules. For example, there is not 1 stock in the top 10 holdings of CDZ that I would hold in my portfolio this morning:
Let’s just say that I’m not really surprised to learn that CDZ has underperformed in the Canadian market over the past 3 years.
What about my returns?
Just to prove you that I’m not some kind of lunatic dividend cultist, I’d like to share my past performances. I’ve done it many times on this blog already, but I’m doing it once again with a screen shot of my online broker’s account.
As you can see, my 3 year annualized return is at 13.5% and I achieved 15.4% in 2017. My 3 year return is not 1.24% (13.5% – 12.26%) better than the other ETF investing strategy, it’s really a performance that is 10% better ((13.5%-12.26%)/12.26%). Did the dividend cult really beat the cheerleaders’ team? In this case, yup. Overall? Nope.
Dividend Investing Vs ETF Investing
As I mentioned earlier, using a 3 year comparison is trivial. It’s fun, it makes people react, but it has no value. In fact, I’m not against ETF investing; I just used this post to share my point of view on both strategies. I think too many people have a biased point of view on the question. They are either for or against a strategy and can’t seem to find a rationale to follow another’s point of view.
ETF investing shows some serious advantages over any stock picking strategies. It is easier and requires less time. You can easily match a professional portfolio manager’s results by picking a few diversified ETFs. Using a “couch potato” strategy like Boomer & Echo’s will bring a good return to the table. Since he invested in “the world”, he can’t be beat by it. It will follow what the equity world’s do. This offers ultimate diversification (I wrote he has over 10,000 stocks inside his ETFs) and tosses away all the buy/loss struggles. You have more money? You simply buy more of the same ETF!
On the other side, dividend growth investing provides investors with lots of compounding powers. At one point, the portfolio generates so much money that you don’t even have to work. Don’t believe me? I happened to read another refreshing article right after Rob’s. Dividend Growth Investor, a fellow blogger, just reached financial freedom with its dividend portfolio. From his article:
“…my forward dividend income from my taxable and tax – deferred accounts is set to meet or exceed my expenses.”
When thinking about retirement planning, dividend growth investing provides a solution that few investing strategies offer. Picking stocks from the best dividend growers list will help you achieve this milestone.
I prefer dividend growth investing because I’m able to select companies, according to my own investing rules. Each company is in my portfolio for a good reason and I sleep well at night. I don’t have to wonder where the market goes, I know my picks are solid and will make my retirement plan happen. In the end, the strategy doesn’t matter as long as you achieve your plan.
The bottom line isn’t the kind of strategy
Building and following a portfolio isn’t an easy task. It requires time, a strong financial background and the ability to set your emotions aside. If you lack of any of the three pillars I mentioned, I strongly suggest you ignore both strategies and run toward a financial advisor or, at least, a robo-advisor to take care of your money.
Many people think that ETF investing is for everyone, but that’s not true. Any “DIY strategies” will leave you with the same issues and concerns when the market goes bust. This is why so many people should continue to invest with an advisor. Most people fail at investing not because they have chosen ETF or dividend investing, but they fail to follow their strategy. Once you have found a strategy that fits your need and will help you achieving your plan, stick to it no matter what.
In the end, I think there are valid point in using both strategies and possibly that the ultimate strategy would be to combine both! But that’s for another discussion…
I invest almost exclusively in ETFs. Like you mentioned that is the strategy I picked and no regrets. Your points about being unable to pick specific stocks is very valid. That being said I am happy with the instant diversification I am able to get. Finally, there are specific themed ETFs which might serve specific purposes.
Hey Dividend Geek,
I think both strategies work well depending on the type of investor you are. However, I think that, more than ever, an educated investor can beat the market / ETFs and fund managers. The key is to build a solid investment process and stick to it. Unfortunately, most DIY investors don’t even care to write down their investment thesis and they start buying everything when the market is high and selling half of their portfolio when the market drops. This is why we keep reading that individual investors can’t beat the market. The truth is that it’s a lot easier to manage a few hundreds of thousands or a couple of millions than managing a $100M+ portfolio where each move may have an incident on the market.
Usually there is a leader at the head of a cult that everyone else worships. I don’t see this being the case for the dividend investing community so it’s not really a cult, lol. I’m a dividend growth investor for Canadian stocks to take advantage of the tax credits. But when it comes to the European markets I use indexing since I don’t have time to research which individual stocks are good over there.
That’s because we have hidden him well 😉 hahaha!
I think that when you want to invest in a larger market or in a market that requires more attention (like understanding the European market on top of the Canadian and US one), ETFs are a great tool!
Dividend Growth Investor
I would argue that Rob Carrick’s article is an example that index investing is the strategy in a cult – it uses the presumption that buying anything other than index funds is wrong ( or cultist)).
E.g. It didn’t explain how his 24 stocks did versus the two ETF picks.
It also uses the vague information that indexers do better than non-indexers – but there is no evidence at the individual investor level if that is the case or not. I mean, how does he know if Rob’s portfolio of index fund picks is doing better than my portfolio of dividend stock selectons? A lot of index investors are stock pickers, who pick a bunch of ETFs, and then claim they will do better than someone else. How do they know that? Also, would those people stick to their index funds if we get a prolonged bear or sideways or low return market?
In addition, the idea of a home bias is perhaps valid for the Canadian investor. For the US investor, owning foreign stocks has been detrimental to returns at least for 25 – 30 years. That is a lifetime.
Furthermore, the article fails to mention that while Rob owns 10,000 stocks, the reality is that his returns are largely dependent on perhaps 50 – 100 large companies. For example in the US, the returns on Dow Jones, S&P 500 and Total Stock Market Index ( 30 companies, 500 companies, 3800 companies) are the same over the past 25 – 30 years. You DO NOT NEED thousands of companies to get returns.
At the end of the day however, I think that Rob did the right thing for himself. He is investing in a certain way that also gives him credibility in his advisory business. Plus, he has told me he has no time or desire to research and buy stocks.
Perhaps you and I Mike need to become ETF converts, and charge people some fee to manage their assets of 1 – 3 index fund picks. We cannot be blamed for poor performance, “because the market was down, and noone can predict it”. So all of our time can be spent marketing our business. It is brilliant really. And there are advisers charging people 1%/year in AUM to pick a few index funds for them.( though Rob is a flat fee type, which is good for him because he is not greedy)
I just love your idea of building our own ETF farm and charge for it! hahaha! The Dividend Growers finally converted to the REAL and ONLY way to invest… yeah that’s sounds like a cult! lol!
With the wide variety of ETFs now, it has become as complicated as stock picking. There is now a whole business behind ETFs and their underlying! An advisor once told me that when you invest in ETFs, you are 100% sure to NOT beat your benchmark. You can only follow it with a few bips behind.
Well, I imagine that we would get tons of free publicity too. All index investors will share our story on forums because it would confirm their views and make them feel better about their own portfolios. Plus, journalists will write about us, index investing books will use as as examples, etc
I agree that etf picking is as subjective as stock picking. But the best part is if I picked an etf that loses money, I can blame it on the asset class, not on my lack of skill and trying 🙂
Andy in Calgary
In my experience both views are right and both strategies are good, and there are benefits and detriments with both strategies. Dividend Investing requires more time, research, thought and management of a portfolio, and some folk enjoy this aspect and outside of a TFSA/RRSP with DRIP accounts etc this a tax efficient option given dividend taxation in Canada.
Indexing/ETFs on the other hand provide a simpler route to investing over a more diversified / international portfolio with a lot less effort if that is what the investor is looking for.
Regardless of which route turns out to produce a better performance over a 5, 10 ,15, 20 year period, I think we can all agree the costs of buying and owning individual dividend producing stocks and / or ETF’s are significantly lower than owning the same or similar investments in Canadian mutual funds, and thats the point of why most of us as individual investors choose dividend stock investing and/ or Indexing as our strategies, to gain that extra 1.5 – 2.0% in our portfolios each year that we would loose by following the heard and buying in to the mutual fund products that provide so little value compared to how we invest.
Thank you for the article. Perhaps ETFs, or some ETFs are appropriate for total beginners who are just learning what to look for when picking stocks. The majority of my stocks (Can. and US) are dividend grower. I own a few stocks for growth that pay no dividends.
I was intrigued by your comment: ” For example, there is not 1 stock in the top 10 holdings of CDZ that I would hold in my portfolio this morning:” Why? Because I own or have owned some of the stocks in that list. Would you please provide some critique of those stocks? Some readers may appreciate learning of your cautions.
First, I’m not a big fan of the Energy sector. It is volatile and not exactly the best dividend growth source. Second, I don’t like IGM as I think there are better option in the financial sector than picking a company charging 2%+ MERs on their funds. It doesn’t sound like the future of investing. Third, Corus is a sinking ship, it would definitely not be part of any of my portfolio today.
I use 7 dividend growth investing principles to build and manage my portfolio: