Canadian Dividend Investors
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Beware of Self-Serving Advice
Advisers traditionally earned their income from selling financial products rather than providing unbiased, holistic financial planning.
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Preet Banerjee
Preet Banerjee is a behavioural financial researcher and a consultant to the wealth management industry. As he explains, whether or not you decide to manage your investments on your own or retain a financial advisor, you should periodically verify, by independent means, that the values of your accounts, as reported by your financial institution, are accurate. You do not want to become a victim of a financial scam, such as that perpetrated by Bernie Madoff on his clients. Trust but verify!
If you are willing to learn how to read and interpret company financial statements and evaluate a company's future financial prospects, you should be able to significantly increase your investing income and reduce the number of years required to achieve financial independence. Even if you prefer to retain the services of a financial advisor, becoming more knowlegable about investing will enable you to better understand your options and make more informed investment decisions.
Most of the advice commonly provided by financial institutions and advisors is applicable to clients who know nothing about investing and are not interested in learning more. However, as discussed in the following sections, if you are willing to learn some basic investing principals, you can significantly increase your investing income as compared to a know-nothing investor.
Common Advice: Only Full-Time Professionals Can Be Successful Investors
Financial advisors will tell you that investing in stocks is complicated and should not be attempted by anyone who does not have the relevant financial education, professional qualifications and experience. You might be interested to know that one or the world's most successful investors, Warren Buffett, does not share this opinion. He once said " If you have more than 120 to 130 I.Q. points, you can afford to give the rest away. You don't need extraordinary intelligence to succeed as an investor."
In fact, any reasonably intelligent person should be able to manage their investment portfolio successfully, provided they are willing to acquire a basic understanding of business finances, so that they can select and monitor the financial performance of 5 to 10 financially successful companies that have a history of paying growing dividends.
Financial advisors will also tell you that managing an investment portfolio requires full-time monitoring of rapidly changing and unpredictable market conditions so that your investments can be adjusted to ensure maximum returns. However, share prices and stock market gyrations are of little importance to dividend investors and can be safely ignored, except if the share price of one of your favourite companies falls to an attractive value. As our mentor Warren Buffett famously said, " I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years." Good advice.
If you are new to investing, you should begin gradually by investing just a small fraction of your savings. As you gain experience and confidence, you can increase the proportion of your savings you invest over a period of several years.
Common Advice: Focus on Share Prices and Capital Gains
If you read the financial news or watch business channels on television, you will discover that the industry is focused on and constantly discusses the fluctuations of the stock markets and the share prices of individual companies. It is no surprise then, that you will find yourself doing the same. Understand that the reason that the media pays so much attention to the gyrations of the stock market is simply because they they must attract the attention of as many readers as possible if they are to survive. Dividend payments are much more stable (and boring) than share prices, so they are of little interest to the media and the general public.
Many traders and financial experts pay close attention to stock prices because they hope to earn capital gains, by buying shares at a low price and selling them when the price rises. Moreover, the financial industry has an incentive to encourage trading, because much of their revenue is generated from trading fees. Several academic studies have shown that the vast majority of people who actively trade stocks in an attempt to reap capital gains, lose money. Your odds of earning capital gains are about the same as your odds of beating the house in a gambling casino. If you really want to gamble with your money, go to the nearest casino where at least they serve you free drinks.
If you follow a strategy of buying financially successful companies that have a history of paying and growing their dividends, you can safely ignor share price fluctuations and the stock markets. As a dividend investor, you only need to periodically review the financial performance of the small number of financially stable businesses you hold in your portfolio, to confirm that they are expected to continue to be financially successful.
Common Advice: Diversify Your Investments with Cash, Bonds, T-Bills, Exchange Traded Funds
It makes intuitive sense to diversify your investments, so that if one of the businesses you own unexpectedly fails, your loss is limited to a small fraction of your savings. The issue then, is not whether you should diversify your investments, but rather, what is the minimum number and types of securites you should hold in you portfolio, to minimize the risk of losing a major portion or all of your savings.
Most financial institutions recommend that investors hold a broadly diversified portfolio that includes three categories of investments: 1) cash or cash equivalents (such as money market funds); 2) fixed income investments (bonds, Treasury Bills, or GICs) and; 3) equity investments (common shares of public companies). In this latter category, many institutions recommend that your equity investments be further diversified among 50 to 100 different public companies headquartered in different countries.
Clearly it would be impossible for most people to effectively manage a portfolio which contained such a large number and variety of investments. Therefore the only practical option is to buy mutual funds or exchange traded funds (ETFs). However, academic studies have shown that the majority of such managed funds underperform their respective stock market indices and therefore many financial experts recommend that investors simply buy a low cost ETF that emulates one of the benchmark indices, such as the S&P/TSX Composite Index or the S&P 500 Index. This approach guarantees that you will always match the performance of the overall market.
The disadvantage of investing in an ETF index fund is that your annual dividend income will be minimal, because index funds contain a large number of companies, many of which do not pay a dividend. The adjacent chart compares the dividends paid each year by the iShares XIU fund (which emulates the S&P/TSX Composite Index), with the dividends paid by my focus investing portfolio. For this comparison, it was assumed that in both cases, $100 was placed in each portfolio at the beginning of 2010 and no additional funds were contributed to either portfolio, except that in both cases, the dividends paid into the respective portfolios were reinvested.
The chart shows that the $100 invested in the iShares XIU fund at the start of 2010, paid a dividend of $2.50 at the end of 2010, which gradually increased each year to about $5.00 by the end of 2023. In contrast, my focus investing portfolio paid a dividend of $5.50 at the end of 2010 which gradually increased to $22.00 by the end of 2023.
The results presented in the foregoing chart demonstrate that you can achieve a significantly higher dividend income, by carefully selecting and investing in the common shares of 5 to 10 businesses that have a record of paying growing dividends and that can reasonably be expected to continue growing their dividends into the foreseeable future.
Common Advice: Rebalance Your Portfolio Holdings Each Year
Financial institutions recommend that you periodically rebalance your portfolio, so that if you hold a position in a company whose share price is growing much faster than the share prices of your other holdings, you should sell some portion of the faster growing company and use the proceeds to buy more of your slower growing investments, in an attempt to have the market value of each of your holdings grow at about the same rate. As Warren Buffett explains, rebalancing your holdings in this way defies common sense. It is like trading Michael Jordan to another team because he is scoring more baskets than the other players on your team.
Moreover, in making this recommendation, the institution is drawing your attention away from the dividend income generated by the stock and back to the share price. If the share price of one of your holdings is increasing because the dividend payments are growing faster than the dividends of some of your other holdings, then you might consider buying more shares of the company, provided you can acquire them at an attractive price.
1. Banerjee, P., 2025. Is your adviser buying investments that suit their wallet better than your retirement? Three questions to ask. The Globe and Mail, Toronto, ON, March 23, 2025.