How to Build a Dividend Growth Portfolio

If you’ve been following for a while, you will come to learn that I’m a fan of two investing strategies, index investing (buying the broad market with low fee ETFs/mutual funds) and income producing dividend growth investing.

I like index investing for its ease, low cost, and ability to beat most active mutual fund returns over the long term.  I use this strategy for: my spouse’s RRSP; the international portion of my RRSP; and, the education fund that I setup for my two kids.

Dividend growth investing is another beast.  Although, if executed correctly has the potential for long term market beating returns, I’m really in it for the income.  There’s something about the idea of owning a piece of the very best companies out there, being paid to own them with annual raises, and using very little effort on my part.  It really is the definition of passive income.  The cherry on the cake is that Canadian dividends get preferential tax treatment (for now).

A reader question that I often get is “what dividend stocks should I buy?” I tend to cringe a little at that question because I believe in picking dividend stocks as part of an overall dividend portfolio, rather than buying a couple stocks for a big win. If i were to start with just a few, the dividend kings list is were i’ll look first.

Building a Dividend Portfolio

Having said that, what stocks would I pick to build a diversified dividend portfolio? Here is the criteria that I review when 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 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.

Strong Dividend Stocks by Sector

Here are some of my favorite dividend stocks sorted by sector.  Note that these are not recommendations and should be used for informational purposes only.  Also note that this portfolio has a Canadian bias, so if you need more diversification, you’ll need to pick up more US and international positions.  Personally, I typically use an ETF to diversify my portfolio with international exposure.

One more thing, not all of the positions below perfectly fit the criteria that I listed previously.  So best to use this list as a starting point for your research.

  • Telecom – BCE (BCE), Telus (T), Rogers (RCI.B), AT&T (US:T), Verizon (US: VZ).
  • Pipelines – Enbridge (ENB), TransCanada Corp (TRP).
  • Financials – Any of the big banks: Royal Bank (RY), Toronto Dominion Bank (TD), Scotia Bank (BNS), Bank of Montreal (BMO), CIBC (CM); Insurance: Manulife (MFC),  Great-West Life (GWO), Sunlife (SLF).
  • Resources and Materials – Suncor (SU), Agrium (AGU), Exxon (US: XOM), Chevron (US: CVX).
  • Utilities – Fortis (FTS), Canadian Utilities (CU), Emera (EMA), Brookfield Infrasturcture Partners (BIP.UN).
  • Health Care – Johnson and Johnson (US: JNJ), AbbVie (US: ABBV), Cardinal Health (US: CAH).
  • Consumer – Empire (EMP.A), Loblaws (L), Walmart (US: WMT), Procter and Gamble (US: PG).
  • Industrials – Canadian Pacific Railway (CP), Canadian National Railway (CNR), Finning International (FTT), Emerson Electric (US: EMR).
  • Technology – Microsoft (US: MSFT), Intel (US: INTC), Apple (US: AAPL).
  • Real Estate – Riocan (REI.UN), Canadian Real Estate Trust (REF.UN), Smart REIT (SRU.UN).

If you are interested in my personal positions, you can see some of my favorite dividend holdings here.

Taking Dividend Investing to the Next Level

Dividend Stocks Rocks (DSR), is a highly recommend newsletter and product if you want to take your dividend investing to the next level . It is managed by my fellow blogger Mike Heroux from the Dividend Guy Blog since 2013.

DSR is not just a weekly newsletter with stock picks. It’s a program that will help you manage portfolio and improve your results. You can first read our detailed DSR review, or sign up now using our exclusive 45% lifetime discount  by clicking the button below.

Dividend ETFs

If you are interested in dividend investing, but not interested in picking individual stocks, then the next best thing is to own a dividend ETF.  The only downside with owning Canadian based dividend ETFs is that you may get a concentration in a particular sector, like financials in Canada.

Here is an article that summarizes a number of Canadian dividend ETFs.  The ETFs include:

  • S&P/TSX Canadian Dividend Aristocrats Index Fund (CDZ) (MER: 0.67%)
  • Dow Jones Canada Select Dividend Index Fund (XDV) (MER: 0.56%)
  • FTSE Canadian High Dividend Yield Index ETF (VDY) (MER: 0.22%)
  • BMO Canadian Dividend ETF (ZDV) (MER: 0.39%)

Since that article, PowerShares released a dividend ETF, that is quite attractive – trading symbol PDC.  It tracks the NASDAQ Select Canadian Dividend Index, and charges a MER of 0.50% which unfortunately is a bit on the high side.  What I like about this ETF is that is has less exposure to financials than others and it includes real estate exposure via real estate investment trusts (REITs).

If you want to go the ETF route, I would highly suggest that you visit their respective websites to see the sector exposure that you are getting.  Most of them will have very little real estate exposure, so you may want to add a REIT or two depending on your existing real estate exposure.  More on this below is available on the best dividend ETFs in Canada article.

Discover the best free ETF brokers in Canada

View our detailed Canadian broker analysis

Real Estate Investment Trusts (REITs)

I’ve written about REITs in the past and holding some of the larger Canadian names in my TFSA for quite some time. Although REITs generally have a higher than average distribution yield, they are not known to have an increasing annual dividend.  The exception being Canadian Real Estate Investment Trust (REF.UN) which has a respectable 15 year streak.

Rather than picking individual REITs, you may want to use a REIT ETF instead.   Some of the available options include:

  • iShares S&P/TSX Capped REIT Index ETF  (XRE) (MER: 0.61%)
  • FTSE Canadian Capped REIT Index ETF (VRE) (MER: 0.39%) 
  • BMO Equal Weight REITs Index ETF (ZRE) (MER: 0.61%)

To me though, these REITs charge quite a bit for very few holdings.  For example, XRE has 16 holdings with VRE/ZRE not much better with 19 holdings.  The top 10 holdings of each of these ETFs make up about 75% of the entire ETF.  Personally, I would prefer to pay 0% MER and get semi-close tracking of the REIT index by owning the top 5 holdings – REI.UN; HR.UN; CAR.UN; SRU.UN; and, REF.UN.  Owning these positions will give you about 55% of the REIT index.

Final Thoughts

There you have it, a summary of how I pick dividend stocks and a listing of current favorites by sector.  This should give you a general idea on where to start when looking for quality dividend names in Canada and even a few positions in the US.  As another disclaimer, I own a number of positions mentioned in this article.

To supplement this article, take a look at:

FT

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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The Financial Tech
3 years ago

Great post, dividends can really bring a nice cashflow.

On my side, I am looking to get ZDV and ZRE in my portfolio. I’ve also added a risky one the FIE etf just for fun.

Brian
3 years ago

It is not that Fie is risky, but more that it is paying you a greater dividend that the securities within the etf payout, thus you are getting a return of your own capital each month.

John
2 years ago
Reply to  Brian

Would you care to explain the “return of your own capital” each month… Seems to me that, after a while, you’d be left with zero shares since your capital would have been completely returned to you. How can that be ?

passivecanadianincome
3 years ago

great post, I like that suggested dividend list. Great etfs got to look into that for my sons resp. thanks again

APF Blogger
3 years ago

Thanks for the excellent post. The only thing I would add is that for many investors, especially those that are just starting out, achieving the diversification that is necessary to bring risk levels to reasonable level can require a lot of transaction fees. A lower fee ETF such as VDY can be an excellent place to start (and remain for most). And while you are still building your nest egg and don’t need the regular cash flow you can set up a DRIP to reinvest the dividends (which further reduces transaction fees).

Brad Ferris
3 years ago

Great Article. Only item I would contribute would be that over the past 15 years I have found that the balance of yielding stocks is really important. I target 40% of my stocks at lower yields but higher dividend growth (8-10%) and another 40% at higher yields and moderate dividend growth (4-6%)
Example would be Saputo (SAP) and Royal Bank (RY), or Metro (MRU) and Enbridge (ENB), CNR or Atco (ACO.X) and Suncor (SU).
This way the majority of the stocks are always raising their dividends, but even yields under 2% can be very helpful IF they are raising them at double digits. The balance really helps to accelerate the income growth, which allows you to buy more dividends stocks, which compounds into more dividends.

Brad Ferris
3 years ago
Reply to  FT

I’m here often, just taking a passive glance!
The favourites have always been CNR, MRU, SAP & ACO.X (SC also before takeover)
The strategy (40/40 high/low) has helped me achieve around a 9.5% increase in dividends every year depending on the phase of the cycle we are in. 2008-2010 did not yield an increase like that, but I was fortunate to get around 5% overall (income) during that time period.
I’m writing a post right now where I just entered a minimum of $1k/month in income from our portfolio which was a huge benchmark I wanted to get to before 40. I’m not a big fan of yield on cost, but here are the approx #’s from the favourites for readers who want to back test or gain insight into building the portfolio at 40/40:
ACO.X – 6.0%
CNR – 6.9%
MRU – 7.1%
SAP – 5.7%
In the US Hormel Foods (HRL) has always been on of the leaders in my portfolio like this too.

Frank
3 years ago

Any thoughts on the impact from rising rates on dividend paying stocks, especially given valuation? At this stage, if you were starting out, would you look elsewhere for income? If so, where?

Dividend Growth Investor
3 years ago

FT,

That is a great article for beginning dividend investors. I am really enjoying reading about your transformation into a dividend growth investor.

The one thing about ETF’s is that these fees seem very high. Wouldn’t it be cheaper for someone to just replicate them directly by paying a one-time brokerage cost, and then letting it alone?

Good luck in your dividend investing journey!

Dividend Growth Investor

elizabeth
3 years ago

i – I am so new to investing but already 53 years old! We’ve had apx $250K in RRSP GICs making nothing over the eyars. Now waiting for them to mature June 2017 and Feb 2018 until we can start investing. Van City has offered a person who charges 1% a eyar on portfolio but has sound investing in equities. He does not support Mutuals or Index as he does not want to invest in a huge portfolio where many of the compnaies don’t make money so his thinking is to invest in winning secure equitities. He studies Mawer investing and all the key winners out there so , once again, he is a sound investor. However, 1% sounds like alot to me. Is it? $2500 a year in fees. Should I follow ” The SImple Path to Wealth” and just invest with QuestTrade with a Vanguard
US index fund and an international index fund and keep things simple? Apx what would my fees be there if I did this? Also what index fund do you reccoemnd for Canada dividend equities that is simple? Thanks for any help to anyone in this chat?
Liz

John R
3 years ago
Reply to  elizabeth

Elizabeth, it’s different strokes for different folks, depending on your experience of investing outside of GIC’s or when it’s in the hands of an investment advisor, to what is your ultimate goal to age 65.

My wife and I are 70 years old, so it’s a ‘been there, done that’

It also depends on the individual person, their age, lifestyle, income while working, children/grandkids and what they are trying to achieve.

There is no such thing as a sprint to the finish line with a quick growth investing, investing is a marathon, one step at a time making sure that you don’t trip so that you cannot pick yourself up.

You can read books, blogs like this one where folks have different views on what to invest in.

Most successes seem to be long steady growth from dividend paying stocks and reinvesting the dividends. As to which equities, well that’s the million dollar question.

With $250k in an RRSP, my guess is that you want that invested as safe and sound as possible, growing 3% per year & compounding for the next 12 years?

Maybe 1% – 2% per year return secured investment in the bank is best.

You will get suggestions from blue chip dividends stocks and whatever else is out there. There is no straight forward answer, as there is no predicting which way any investment in the stock market will go.

My suggestion is to always make sure that the original capital you invest never ever loses it’s worth and be cautious of anyone that tells you ‘so and so returns are possible’

joanne
2 years ago
Reply to  John R

Thanks John for your feedback. Ok- I have read a little more and am still trying to figure our what to do with our $250k RRSP. Right now it is in a TD balanced and some in the TD tactical Mutaul funds with ridiculous 2.4% in MERs & scare tatics from TD guy that that MER pays for expert advice on how to grow our money and prepare for retirement.
From the reading, I have been doing lately, I am leaning towards investing this RRSP into a Drip Dividend portfolio strategy similar to FTs strategy. Thoughts? I have set up a self driected TD account but I am still waiting to understand if this is a best strategy. I am not into “get rich quick” I just want our money to grow at better rate than currently and I would like our investment to eventually provide our income for when we reach mid 60’s. I will have more money to invest when we sell our home ( apx $600K) plus I have some investments my company’s pension plan where the have matched my contributions up to 4% ever year.
Hoping some people can guide me. Thank you- fabulous forum!

bm
3 years ago

Any thoughts on the Tangerine Dividend Portfolio? Admittedly, the fees (MER 1.07%) are higher than ETFs, but it seems like a nice, easy all in one option for beginners.

John R
3 years ago
Reply to  bm

it’s a mutual fund. The offering states ‘medium risk’

For comparison performance wise against the ‘equity growth’ product launched in 2011

http://quote.morningstar.ca/quicktakes/Fund/f_ca.aspx?t=0P000192K9&region=CAN&culture=en-CA

http://quote.morningstar.ca/quicktakes/Fund/f_ca.aspx?t=0P0000V7CN&region=CAN&culture=en-CA

bruce
2 years ago

Hi!
I haven’t posted in years but have followed this blog on and off for years. Thank you and congrats to everyone.

I have the majority of my net worth and assets in real estate, which produces good rental income, moderate cash flow and debt pay down. I do have RRSP and RESP portfolios (slightly over $500k) but would like to have a dedicated dividend portfolio and dividend stream to augment my rental income.

I have a question(s) not regarding the stocks as so much as regarding the actual implementation of starting a “Dividend Growth Portfolio”…in early 2018 that I want to grow to $1mln in 6-7 years

1) Would you put a chunk of money in now or would you put a chunk in now and do monthly contributions?
2) What do people thinking about putting on some mild leverage on it so I can write off the interest? I think in FT other articles he likes to use the home CL to fund.

retireby45
1 year ago
Reply to  bruce

I am in similar situation as yours. Most my passive income is via rentals plus RRSP/RESP contribution. And I am getting into building some passive income via Dividends.

What did you end up doing? Can you please share. It will really be helpful

TIA

bruce
2 years ago

Hi FT,

Do you or anyone else mind going through the specific mechanics/steps to
1) start a new dividend portfolio. how would you divide it up (how many stocks? 8-15?)

2) how often to contribute to this portfolio, and how. for example – automatic withdrawals?

3) how to track it in Excel and what specific columns you put in? Cost base? dividends, dividend yield %, current price?

Many Thanks
Bruce

StockBite
2 years ago
Reply to  bruce

Hi Bruce,

A few answers to your questions … all just my opinion!

1) to start a new dividend portfolio, you need to set up an online brokerage account. There are many to choose from. I am a Canadian, so I use RBC Direct Investing, but you would be fine with any of the large ones. Once you have it set up and funded, I would argue that 8-15 stocks you mentioned would be a great start. Over time, however I am firm believer you should build out your portfolio so no particular stock is > than a 5% weighting – this means about 20 stocks at a minimum.

2) This one is subjective. The answer is: you should contribute as often and as much as you can afford! The magic sauce here is consistency. Be consistent with putting money away and you’ll be way ahead in the end.

3) You nailed this one… an excel tracker doesn’t need to be complicated! Simple things to track, as you mentioned are things like shares owned, current price, market value, dividends per share, dividend yield, adjusted cost base, and cash balances. There isn’t too much more that you need in my opinion, but I would recommend reading up on tracking adjusted cost bases, in particular, especially if you are investing in taxable accounts.

Hope this helps!

John
2 years ago

Hi. I am presently a passive investor using Vanguards VGRO. I like the idea of dividend investing but leaning towards adding a dividend mutual fund to my portfolio rather than an ETF or actual dividend stock. I just want to be simple. Are there any dividend mutual funds that stick out for you? Perhaps Beutel Goodman Canadian Dividend (BTG 875) which has international exposure or RBC Canadian Dividend (RBF 1014) which is more domestic. Thanks for your suggestions.

John
2 years ago
Reply to  FT

Hi. Thanks for the response. Some of the dividend mutual funds that I have suggested have outperformed many of the Dividend ETFs at the 5, 10 and 15 year mark. At least that is my interpretation….could be wrong! I’m also looking for something in a non registered / cash portfolio and don’t necessarily want to do calculations such as Adjusted Cost Base for Dividend ETF’s. Just too complicated for me. These figures / adjustments are completed by the mutual fund companies (and a tax form is generated), but not necessarily so for ETFs. Again, I am talking about non registered accounts. I just want something simple.

John
2 years ago

I do enjoy your website, your passion and reading about your success. So I will continue to read and research and come up with a strategy for dividends in a non registered. Thanks

Scott Hawkins
2 years ago

My wife and I ,also have 350 k invested at a Canadian bank in rrsp
with a high 2+% met
when i ask
i am threatened with well it may not be going up but it is not going down.
i would like to switch to earn

Dale Roberts
2 years ago

Hi FT, for those who do not want to manage their own investments, there is that Tangerine Dividend Portfolio. While the fees are at 1.07% that might be good value for those who want a managed portfolio. It tracks the MSCI Indices in Canada, US and International. Those indices have beat the underlying parent index (over longer periods) in Canada, US and International. That largest beat is in Canada, largely thanks to those big Canadian banks. One can google to find the fund fact sheets. Eg MSCI Canada High Dividend Index. MSCI US High… etc.

Dale Roberts
2 years ago
Reply to  FT

Thanks FT, but most do want to need a managed portfolio. As you likely know, it’s more than difficult to get many Canadians to make that leap to self directing. There are some massive barriers.

I am more in favour of index skimming and removing the fees altogether, ha. It does not take many to replicate an index. But that would likely even scare most index investors.

There are many advantages to individual stock portfolios beyond the fees. My circuitous route was individual stocks to index ETFs and back to stocks by way of skimming. Ha.

Dale

The rich dog
1 year ago

Have you had a look at Canadian Couch potato’s debunking dividend myth series? https://canadiancouchpotato.com/2011/01/18/debunking-dividend-myths-part-1/

From what I understood from it, it seems better to keep going full indexer rather than try living on dividends only? Just wondering what your opinion was on the subject since I respect and follow both of you

The rich dog
1 year ago
Reply to  FT

But from what I understood the point was that dividend stocks weren’t actually better than others since the dividend they hand out is subtracted from the overall value of the stock?

Bruce
11 months ago

Hi,

Thank you for your comments everyone. I commented about 2 years ago on starting a dedicated dividend portfolio. I basically still have RRSPs, TFSAs and RESP and some cash of nearly $1mln. I don’t have a dedicated dividend strategy yet but finally going to implement it in 2020. Basically, I needed to close my last 2 pre-construction condos that were bought 3 years ago and they are now fully rented.

For the time being I want to let my real estate portfolio ride along.. We have 7 properties including our principal residence. Thus, I have 7 mortgages, and I deduct the interest for each property on form T776 every year. Thus, I am leveraged and finally after many years of real estate investing, the last 5 years have payed off. We have about $8mln of real estate and $3.3mln in mortgages. All properties are CF positive (except the principal residence which we enjoy) and I love the passive income and mortgage principal pay down each year (about $80,000 of principal repayment each year).

Our goal is to now build up our stock/dividend accounts for passive dividend income. Long term goal of $50,000/year. My plan is below and I am wondering if I am on the right track.

1. Smith Manoaevre. Is this still worth considering given our large debt (good real estate debt)?
2. Do I just start to increase our monthly deposits into TFSA, RRSP and non tax deductible accounts?
3. Since I am comfortable with debt, should I layer in some debt into tax deductible accounts? Maybe contribute monthly and also borrow some, like a Smith Manoevre.

I would love to hear anyone’s thoughts. I need to get this started in 2020!

Thank you
Bruce