Dividend Investing – Your Questions Answered

Henry Mah from “Your Every Growing Income” blog posted a questionnaire for income investors and I thought it would be useful to help summarize my investment principles in a single post.

If you are a regular reader, you’ll know that while I’m a dividend investor, I’m also an index investor at the same time.  In other words, I take a hybrid approach to investing.

I’m generally a dividend growth investor for my Canadian positions and an index investor for my US and international positions.  While I started off being a dividend investor for my US positions (in my RRSP), I have been slowly moving this to an indexed portfolio using some combination of Vanguards VTI, VXUS and/or iShare’s XAW and XUU depending on the portfolio (see tax efficiencies of ETFs).

Why do I like dividend growth investing?  For a number of reasons:

  1. It can provide a passive income stream for life (and with raises);
  2. It encourages buy and hold for the long term;
  3. Canadian dividends are extremely tax-efficient (when there is little/no other income); and
  4. Living off dividends, even though requires a larger portfolio, reduces sequence of returns risk.

I’ve been building my dividend portfolio since 2008 and it has grown from producing $100’s per year in dividends to $50,000+ in dividends so far in 2019.  We are just about to hit our cross over point which is when our portfolio income surpasses our recurring annual expenses.  At that point, we’ll hit the financial independence milestone, which will be a big one for us.\

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So on the topic of dividend investing, let’s get into some question and answers.

1. Which stocks should you buy and why?

For dividend investing, I like to buy companies that have a long history of increasing their dividends on an annual basis.  These companies are typically larger blue-chip companies with a competitive advantage and lots of cash flow.  Here in Canada, companies like Canadian Utilities and Fortis have 45+ years of increasing their annual dividends.  For more ideas, you can view a list of the top 22 dividend growth stocks in Canada.

In my last financial freedom update, I provided a list of my top dividend companies by the position size, and they included:

  1. Emera (EMA);
  2. TransCanada Corp (TRP);
  3. Fortis (FTS);
  4. Bell Canada (BCE);
  5. Canadian Utilities (CU);
  6. Enbridge (ENB);
  7. Bank of Nova Scotia (BNS);
  8. Royal Bank (RY); and,
  9. Telus (T).

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2. How should you evaluate the merits of the stocks you are considering?

I wrote about how to build a dividend portfolio, which included how I go about picking dividend stocks.  Here are some of the high-level criteria that I consider before making a purchase:

  • Sector Diversification – Since a large portion of our portfolio is Canadian based, I try to diversify by picking dividend stocks by sector. Some use broader sectors, I tend to use: telecom; pipelines; financials; resources and materials; utilities; health care; consumer; industrials; real estate; and, technology.
  • Dividend Growth History – As previously mentioned, I follow the dividend growth investing strategy, which means that I tend to choose dividend stocks that have a history increasing their dividend annually.
  • Earnings History – Even with a solid dividend growth history, a safe bet is to make sure that their earnings are growing with the same trend as well.  It may be a warning flag if earnings are decreasing while dividends are increasing.  It may only be a matter of time before dividends will need to be reduced, or worse, eliminated.
  • Yield above 2% (but high yields may be a warning) – As my plan is to eventually live off dividends one day, I prefer to be rewarded with a yield that is higher than 2%.  Ideally, the yield would be greater than 2.5% but less than 6%.  Why not the higher yield?  Generally speaking, if a dividend stock averages in the 3% range over the long term, but then spikes to over 6%, it could be an indication of a dividend cut coming as high yields can be unsustainable.  On the other hand, it could also mean that it’s oversold and a value play.  It really depends on the situation which means that more research into the company is warranted.
  • Market Cap – My core dividend positions are generally larger market cap companies (ie. big company) with a long history of dividend increases and a long term competitive advantage.

Here are more details on how to build a dividend portfolio.

3. When should you invest more money into new stocks or the ones you already own?

As mentioned above, I like to purchase dividend stocks that “fit” into my overall portfolio.  I like to spread my portfolio of dividend stocks across sectors in Canada, and purchase index ETFs for international exposure.  I typically do not let any single position exceed 5% of my overall portfolio.

In terms of adding to positions, I like to add to stronger dividend stocks when their yields are above their 5-year average. Since the yield is a ratio of the dividend/share and the stock price, rising yields mean a sinking stock price.  While lower prices can be a good thing, when yields get really get out of whack, it may be time to step back and reassess the business as to why the price has dropped so dramatically.

Here is more detail on when to buy dividend stocks.

4. When should you sell your stocks?

As a buy and hold investor, it’s pretty rare for me to sell my positions.  After all, I’m focused on building my passive income, and selling a position would result in reducing my income.  The exception is when a company cuts or eliminates its dividend.

While it’s not often that a dividend growth stock cuts their dividend, it can happen!  In 2019 so far, SNC Lavalin and Dorel Industries have both cut their dividend.

5. Should you be worried when the market and prices are going down? Why?

If you build a portfolio full of companies with a strong track record, broad market sell-offs are a gift for the investor still in the accumulation stage.  As mentioned, lower stock prices mean higher yields, which is one of the key metrics for income investors.

For those in retirement, spending dividends only during down years will help mitigate the sequence of returns risk.

6. Should you worry about Asset allocation and rebalancing? Why?

While I don’t personally own a lot of bonds, I do believe in the merit of bonds in that they can help smooth out the bumps along the ride.  While it can provide a slight drag on the portfolio over the long term, if it can help an investor stay invested through the tough times, they are worth it!  Bonds can be especially helpful in the years leading up to retirement, or in any situation where you need to sell assets within a portfolio for liquidity.

For example, as my daughter (age 11 now) gets closer to University, I’m allocating more of her RESP towards bonds.  Eventually, I will move a portion of the RESP into cash/GICs to ensure that the cash will be there when tuition is due!

Here are more details on how and why asset allocation works.

7. Should you worry if your stocks don’t perform as well as the market? Why?

Most investors would benefit most by indexing their portfolio.  It’s easy, require minimal research, and will beat most mutual funds out there over the long term due to the low cost of index ETFs.  In fact, my wife’s RRSP and our children’s RESPs are 100% indexed.  If market volatility (ie. risk) is a concern, then picking individual stocks (even dividend stocks) might not be the optimal path.

I have been fortunate in that my dividend portfolio has outperformed the Canadian index thus far since inception, but that’s not my goal.  Since early retirement is on the table (possibly in my 40’s) my goal as a dividend investor is to build a growing passive income stream that is tax-efficient and relatively safe.  Beating the market is a bonus!

Final Thoughts

That was a few answers to some common dividend investing questions.  If you have any further questions, feel free to leave them in the comments, or send me an email through the contact form.

Happy Investing!

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FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.
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1 year ago

Great article. I was wondering, for the dividend stocks in your RRSP, how do you plan to handle this when time comes to convert to RRIF at 71? After that there are minimum WDs and may potentially reach a % that will be > your dividend yield. Are you OK with having to sell some stocks at this point?

1 year ago

I just want to say I love your blog as it is very informative.
Had a question on a particular Canadian REIT…WIR.UT
Can you explain how the foreign withholding tax would work in a TFSA?
Would really appreciate any information.

Thank you
Joanne Ruch

Flora Pang
2 years ago

Hi Frugal Trader, I was so inspired by this post I published my own answers (and had fun doing so). :)

On the substance of this post, I want to thank you for sharing that you “like to add to stronger dividend stocks when their yields are above their 5-year average”. That’s one of my biggest takeaways from this post.

2 years ago

Thanks for this great article and all your other content, it’s really been very educational for me while I learn to what to do with my money. I wonder if you have any thoughts about buying retirement annuities and the pros/cons of annuities versus dividend investing?

Dale Roberts
2 years ago

Thanks for the update. Nice to see more on the wide moat Canadian big juicy dividend payers doing so well and beating the market at the same time, as an added bonus. Wondering what your market beat might be in percentage terms.

I have 6 of your top nine, only TD is missing from that list, but I believe you also hold that? I only hold 7 Canucks in total.

Also, why index ETFs for US? It’s easy to skim a bunch, keep fees near to zero (no MER) and create the greatest in tax efficiency by way of holding in US dollar accounts in certain account types.

Thanks again,


2 years ago

Great to peek inside the thought processes of MDJ, thanks for sharing.

Did you end up selling SNC Lavalin? I still have it, it’s dragging my returns down though I just have a small position. :(

2 years ago
Reply to  FT

Man the dividend is minuscule now. Darn corrupt companies!! Lol.

1 year ago
Reply to  FT

I heard some good advice about holding on to stocks you no longer want. Think if you would buy that stock today if you had some money to invest. If you would not, you should sell immediately as holding is the same logic as buying.

2 years ago

Hello FT,

Great article. Currently I have a portfolio of 80% US and Canadian stocks for my RRSP and my 3 year old child’s RESP. I’ve been thinking about transitioning into a index investing approach using vanguard/ishare ETFs. But with all the recession talks, I am also considering buying more bonds/gold ETFs for the time being. Any suggestions? thanks!

2 years ago

Great write up Frugal Trader. Will have to post my response on a post later. I think my responses would be very similar to yours. :)

2 years ago

I don’t know anything about your Canadian funds, but I just invest in a dividend index fund. It certainly pays less than individual companies, but not as complicated nor as risky IMO. I like dividend funds because the price of fund rises over time, but then you can reinvest your dividends (if you don’t plan to live off them yet) which gives you a slight boost in investment.