Since I received access to The Dividend Guy Blog email address, I got a very interesting question from one of our readers. Here’s what Michael had to say:
I’m just starting to look into stock investing and potentially dividend stocks.
After some initial research, my question is this:
How can I make real returns from dividend stocks when the only companies with high dividend payouts have a high cost per stock? If dividends are paid per stock owned, I would need a large number of stocks, but for a large number of expensive stocks, I would need a large amount of capital. I don’t have a lot of money to invest since I’m just beginning (~$1000), so I’m wondering if dividend-paying stocks are more of a strategy once I have an established portfolio and some money to move around.
This is probably one of the biggest questions an investor looking for dividend stocks may have:
When do I start investing in dividend stocks? And, what can I do with my money in the meantime?
In my opinion, you can start investing in dividend stocks with an amount as low as $1,000 without taking too much risk.
But How Can You Invest In Dividend Stocks With $1,000?
You have actually 3 options. However, I would disregard the first option which would be to buy 38 shares of one company trading at $26. This wouldn’t make sense in terms of asset diversification and trading fees. However, you have options #2 and #3 that can be of a great help in your journey to build a dividend portfolio.
Option #2: Consider Dividend Paying ETFs
It is true that $1,000 is too small of an amount to start investing in the stock market…unless you consider ETFs! Exchange Traded Funds have been one of the most discussed investment products in the recent years. Why? Because they can track whatever you want to invest in (stock market, commodities, real estate, bonds… and dividend stocks!). Because they are cheap in terms of fees (compared to mutual funds, ETFs are almost free in term of management fees). And also because they can be traded easily throughout the day.
You can then select an ETF that represents the best dividend paying companies and buy for $1,000. On top of that, you will receive a part of the dividend of each company tracked by your ETFs so it really replicates the fundamentals of dividend investing (i.e. receiving dividends along the way) while reducing your risk due to the concentration of your investment in a single stock.
If you are curious about ETFs that pays dividends, I have sorted the top 5 Canadian and 10 US dividend ETFs:
Top 5 Canadian Dividend ETF:
|Ticker||Name||Market Cap||Price||Return YTD||Fees||1Y Return||Dividend Yield|
|XDV||iShares Dow Jones Canada Select Dividend Index Fund||635851000||19.22||2.469||0.5||12.895||3.8|
|CDZ||Claymore S&P/TSX Canadian Dividend ETF||229748700||18.86||2.528||0.65||21.57||4.6|
|CYH||Claymore Global Monthly Advantaged Dividend ETF||64299520||14.79||-3.224||0.81||14.291||4.53|
|HAL||Horizons AlphaPro Dividend ETF||10350000||10.35||N/A||N/A||N/A||0.99|
|HAZ||Horizons AlphaPro Global Dividend ETF||10413900||10.26||N/A||N/A||N/A||N/A|
Top 10 US Dividend ETF:
|Ticker||Name||Market Cap||Price||Return YTD||Fees||1Y Return||Dividend Yield|
|LVL||Claymore/S&P Global Dividend Opportunities Index ETF||8761600||13.69||-4.724||0.66||20.509||4.98|
|IDV||iShares Dow Jones International Select Dividend Index Fund||134714600||29.6076||-3.728||0.5||15.982||4.42|
|FDL||First Trust Morningstar Dividend Leaders Index||53021030||14.33||1.783||0.45||16.007||4.4|
|DWX||SPDR S&P International Dividend ETF||195907400||50.2156||-5.058||0.46||15.442||4.37|
|PEY||Powershares High Yield Equity Dividend Achievers Portfolio||132678000||8.209||8.957||0.6||28.948||4.37|
|IRO||Claymore/Zacks Dividend Rotation Index ETF||12759500||19.63||4.683||0.99||25.277||4.29|
|FGD||First Trust DJ Global Select Dividend Index Fund||25344040||21.12||-1.705||0.6||20.311||4.14|
|DTN||WisdomTree Dividend Ex-Financials Fund||193102000||42.44||4.745||0.38||25.061||3.89|
|DOO||WisdomTree International Dividend Ex-Financials Fund||138552000||40.16||-5.224||0.58||11.359||3.82|
|DVY||iShares Dow Jones Select Dividend Index Fund||4202382000||45.89||5.661||0.4||23.995||3.64|
Option #3: Consider Dividend Mutual Funds
So tell me, why on earth should you invest your money in a dividend mutual fund when I just said that the ETFs will be way much cheaper? Well, there is always a reason for everything…
The very first thing is that all dividend mutual funds allow you to add systematic investments with no transaction fees. This is not the case with most ETFs (that need to be traded as stocks, i.e. with transaction fees) (however, Claymore offer systematic investments with some ETFs depending on your broker).
Therefore, for beginner investors, starting a dividend portfolio may use dividend funds at first. Most dividend funds will act like stocks, i.e. paying dividends quarterly. They can be reinvested (similar to a DRIP) or added to cash in your account. Since you are starting your investing strategy, I suggest you reinvest all your dividends into the same fund.
As a reference, I have listed a few dividend funds that exist for more than 10 years:
Fund No. Fund Name Fund Type MER\'s Fund Category 1 Yr Ret 5 Yr Ret 10 Yr Ret 15 Yr Ret Legal Status RRSP
1 IA Dividends Equity 1.84% CdnDvIncEq 15.9 7.1 10.6 Segreg Yes
2 IAP Ecflx Dividends Equity 2.11% CdnDvIncEq 15.6 6.9 10.3 Segreg Yes
3 IA Ecflx Dividends Equity 2.11% CdnDvIncEq 15.6 6.9 10.3 Segreg Yes
4 Thornmark Dividend & Income Balanced N/A CdnEqBal 9 5.5 9.2 Pooled Yes
5 TD Dividend Growth - I Equity 1.92% CdnDvIncEq 19.3 5.7 9.1 10.6 Trust Yes
6 RBC Canadian Dividend Equity 1.70% CdnDvIncEq 15.6 5.7 8.8 11.4 Trust Yes
7 Manulife Ser R A Canadian Dividend Equity 2.37% CdnDvIncEq 19.8 3.3 8.7 Segreg Yes
8 Avg Canadian Dividend & Income Eq-Blend Benchmarks N/A Stats 14.2 3.3 8 7.6 9 BMO Dividend Equity 1.70% CdnDvIncEq 13.1 3.4 7.8 11.2 Trust Yes
10 Scotia Canadian Dividend Equity 1.65% CdnDvIncEq 14.7 4.4 7.8 10.6 Trust Yes
11 TD Dividend Income - I Balanced 1.92% CdnEqBal 18.3 4.1 7.7 9.5 Trust Yes
12 IA Clarington Dividend Income T4 Equity 1.89% CdnDvIncEq 18.1 1.8 7.5 8.8 Trust Yes
13 Mavrix Dividend & Income Equity 3.17% CdnFocsSM 27.4 -2.8 7.5 6.1 Trust Yes
14 Med Canadian Dividend & Income Eq-Blend Benchmarks N/A Stats 14.3 2.9 7.5 7.6 15 Dynamic Dividend Equity 1.58% CdnDvIncEq 16 2.9 7.5 7.6 Trust Yes
Once you have picked your options, what is next?
This article will obviously be part of a series where I will describe some beginner steps to dividend investing. For today, I suggest you take a look at the 2 options, consider the trading fees (and MERs for dividend funds) and think a little bit more about how much you want to start investing on a monthly basis. In the upcoming post, I’ll be discussing:
– How to select a brokerage account with dividend investing in mind.
– How to pick your ETFs and/or Dividend Funds.
– When to start investing in dividend stocks.
– What to look at before picking any dividend stock.
– The importance of asset allocation (already discussed on this blog).
– Long term dividend investment strategies.
As I am currently writing this series, please let me know if there is anything else you would like to read about on how to start a dividend investing strategy.
Since I am well aware that I have more experienced investors out there as well, I will publish one post per week on this series. So stay tuned for more advanced tips on trading dividend stocks!
I think you discount stock ownership too quickly. The brokerage fees to buy stock are $10 or less per transacation. If you put $500 into each of 2 good dividend paying stocks that is (one time) 2% in fees which is way less than a mutual fund – which is typically 3-4% per year and less than an EFT at 1% if you hold it for more than a year.
If you continue to add a few bucks a month to your account and accumulate your modest dividends, it won’t take long before you have $300+ to invest in another solid stock. Keep doing this and you will have a well diversified growing portfolio in a few short years.
Interesting point. However, I don’t like the fact of holding only 2 stocks at the very beginning of an investment plan. If you are unlucky with your picks (sometimes, even a good analysis is not good enough), you risk to lose 30% of your portfolio quite easily.
You can find good dividend mutual fund at 2% (and sometimes cheaper), I’ll cover that in a future post.
I am curious as to why you would state the fees in the ETF table but not in the mutual funds table…
The Passive Income Earner
You can buy through the Transfer Agents like Computershare and CIBC Mellon and start a DRIP with only 1 share and you will grow with fractional shares.
I know that the initial fees on getting a share certificate seem high but I have bought my first 6 shares from ‘The DRIP Investing Resources’. It takes a bit of time to be setup but you end up owning the companies at zero cost!
Here is the board: http://dripinvesting.org/Boards/BoardMsgs.asp?BID=8&N=22870
simply because I needed more time to sort them. I’ll add the MER’s later on today.
thx for looking into it! I’ve completely forgot!
I’ve updated the table to show MER’s.
as you can see, there are several great dividend funds below 2% of MER’s. I think it’s worth considering while building your portfolio. Especially if you are a beginner investor.
I disagree that you need a large amount to start dividend investing.
If he bought 16 shares of any dividend paying aristocrat as a beginner investor, he wouldn’t have to worry about diversification because he WILL be paid his dividends. If the stock price goes down, others will be buying as the yield increases thus driving the price back up; that’s one of the corner stones of dividend investing.
He’ll have to add $50-$100 a month to get the ball rolling faster but his portfolio will grow and be diversified with time.
Don’t you think that you would eat up of money into transaction fees or left a lot of money on the table while accumulating money in a high yield savings account vs building a dividend portfolio with etf’s or dividend funds before you get enough to build your own dividend portfolio?
If you trade anytime you have $500, you will pay about 2% in fees each time. I think I’ll try to run more calculation on this topic to see which tradding option is better.
humm …. Wish I had 1000.00 to invest Michael.
I would have to say that anyone with 1000.00 of less can start dividend investing – fact is I did just that 8 months ago.
There are many more options that cost less and give you more.
1) dripping stocks is good (one of the best) ways to start small and end big with both CAD and USD companies. Often the USD companies have direct purchase plans too. (Another way to avoid any broker fees)
2) Consider which discount broker to use carefully: BMO/TD have dividend EFTs and don’t charge any fee for purchasing. Claymore offers an option cash purchase plan with many EFT products – though not all brokers honor the OCP.
Number one have a plan, two avoid fees (even low MER EFTs) – taxes and fees kill investment return. And three as you build your portfolio diversify.
Joining an investment club provides great experience and mentors to help you get started and avoid costly mistakes. Read several books on dividend investing to get a sense of what to look for.
Mike – how many of the above EFTs do you own in your portfolio?
Best to you Michael.
I’ve actually sold all my portfolio a while ago to invest in the biggest dividend paying company; MINE 😉
I’ll actually open another dividend investing account through my company where you will be able to follow my dividend investing. I intend to start investing with ETF’s as I beleive in diversification (even in dividend stocks).
DRIPs technique is definitely a must. I just don’t like buying one or two stocks with $1k.
I’ll be reviewing a few ETF’s in the upcoming weeks as well.
Thank you for the best wishes. I will look into direct purchasing options.
Thank you for all the useful advice in your post. It’s given me lots to think about. I’ve done a little reading about ETFs and mutual funds, and have been trying to decide which would be best suited for me. Your charts will prove very helpful in my research.
I’m a university student, and the reason I have been looking into investing is that I will have a student loan to start paying off once I graduate. I’ve just opened a TFSA Questrade account, because of their low trading fees. With Questrade, I have the option to purchase stocks, ETFs and mutual funds, so no matter what I decide is best, I can go for it.
One thing I have been wondering about dividend stocks is where asset classes fit in (ie. growth, fixed income, etc.), and how my target time frame fits in to an investing plan (approximately 2 years before the money is needed). If I can manage to pay off some student loan when it’s time to start making payments, and still have enough money to keep aside for investing, it would be even better.
I think, this is wrong approach – from the fees perspective. I tried that and fees ate so much that my account was mediocre or down and any gain got me just break even. If an investor has only $1000 to start investing, the only way is to start with NTF funds (non-transaction-fee funds). Let’s look at fees. i have an account with TD Ameritrade. They charge 9.99 for stocks and ETFs and 49 for a mutual fund. Buying with such small money will kill your effort. Even if you use DRIP or automatic investing where most brokers wave the fee, you will not be able rebalancing your account unless you start selling or buying besides your DRIP and that will kill you again. And even with any automated investing when TD waves the fee you still must make your initial investment and pay the fee. With NTF funds it cost you zero and you can invest as little as 1 dollar (or even less). You must make the minimum initial investment, but you can find funds requiring $0 minimum investment and start saving into mutual funds. Another limitation is you must hold the fund at least 180 days to avoid the fee, but that’s easy to comply with. Once you save substantial amount to invest, you can sell a portion of your NTF mutual funds and reallocate to stocks or ETFs. You get a lot better results with this approach that paying unnecessary fees by buying stocks with 1000 bucks which will be very expensive. I do this on my own account and my portfolio is growing very well. You can check it on my website 😉
I think that 2 years is a little bit short to invest in dividend stocks. Even though they are paying dividend, the stock value can fluctuate along with the rest of the market. Even if you had purchased an aristocrat in 2007, your investment still worth less in 2009-2010 because of the 2008 market crash.
If you invest in dividend stocks, you better do it for a long term investment.
How about a site like ShareBuilder, where you can invest any amount of money and buy partial shares, and setup DRIPs for all of them.
1: I have to agree with the others in saying that $1,000 is plenty to start with in specific company stock. You admit that a dividend investor is going to be a long term investment but then worried at losses in the first couple of years.
2: Whats worse is that you say dividend etfs are safer then single stock. In some ways yes but look at some of the solid aristocrats (jnj, abt, ko for example) compared to IDV from before the recent financial crisis of 2008. The problem with an etf is it has the bad companies in with the good.
3: Assuming that an investor is going to continue contributing then I see no reason to not get 2 stocks of $500, or even 3 at $333. As more money is contributed it should far outweigh any capital gains changes in the beginning. At $100 a month you’ll be picking up 2 more stocks per year. That is of course unless you expect an aristocrat to drop 50% in 6 months.
You can build diversification into a portfolio you don’t have to start with it.
Transaction fees are nothing these days. You can get $4 at sharebuilder or $5 at thinkorswim. We are talking 1.5% @ $333 a trade, which is still far cheaper then mutual fund prices are to buy let alone any yearly maintenance fees.
#1 if you consider that this series has been written for beginner investors, it implies that they don’t know about investing yet (which is normally the case of people who has less than $1,000 to invest). Suffering the fluctuation of a single stock can be pretty hard on your emotion and you can be tempted to sell if you are not an experienced investor.
#2 comparing stocks for stocks, if the same beginner investors would have invested in GE or PFE (which both of them were considered as aristocrats), they would be better off with IDV (since its creation).
#3 I understand your point but I think it’s hard for beginner investors to make the right stock pick. Actually, GE of PFE would sound like logical stock picks for a newbie back in 2007, don’t you think? ETF and funds exist to protect beginner investors. The second advantage is that ETF and funds can also be traded with minimal time (analysis) and knowledge.
I certainly disagree that you can’t start with $1,000 and buy shares in two or three dividend-payers. I did exactly that and I’m very glad I did. I have simply added an additional amount each month – and the amount is growing. I much prefer JNJ, KO and PG to an ETF.
I hope beginning investors will not be put off from investing in dividend payers because they have “only” $1,000. They will miss out on wonderful opportunities.
What are your processes when selecting a dividend ETF/mutual fund?
Go with something that have low management fees and that tracks what you want to achieve (dividend growth, S&P 500 or the TSX, higher yield, etc). There are many ways to start investing and there are several good strategies to achieve your goal.
I decided to go with dividend growth investing through stocks (vs ETF or mutual funds). I’m sure other investors succeed with other strategies as well. The key is to stick to a solid strategy and never deviate.