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 Canadian personal finance expert, consultant, author, and media commentator. He specializes in behavioral finance, wealth management, and financial literacy, and is widely recognized for making complex financial topics accessible to everyday Canadians. He recommends that, whether you decide to manage your investments on your own or retain a financial advisor, you should periodically check that the fees you are being charged are reasonable, and the amounts in your accounts, as reported by the financial institution, are correct. 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!
The advice commonly given to those clients who have no interest in managing their investments is discussed in this chapter, including an explanation of why blindly following the advice usually results in sub-optimal returns.
Only professionals can be successful investors
Financial advisors will tell you that investing is complicated and should not be attempted by anyone who does not have the relevant financial education, professional qualifications and experience.
One of 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 finance, so that they can select and monitor the financial performance of between five and fifteen 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, market prices and stock market gyrations are of little importance to dividend investors and can be safely ignored, except when the market price of one of your favourite companies drops to an attractive value.
Focus on share prices and capital gains
If you read the financial news or watch business channels on television, you will notice that the financial industry and the media are focused on share prices of individual companies and fluctuations of the stock market indices. Not surprisingly, you will be left with the impression that successful investing requires daily monitoring of share prices and frequent trading; buying shares when the price appears low and selling them when the price rises, in an attempt to realize capital gains.
Financial institutions have an incentive to encourage active trading by investors because much of their revenue is generated from trading fees. Never mind that numerous academic studies that have shown that the vast majority of people who are active traders lose money. Your odds of earning capital gains by trading stocks 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 a casino where at least they serve free drinks.
The news media pays a great deal of attention to stock prices and the gyrations of stock markets because to survive, they must attract the attention of as many readers as possible. Dividend payments are much more stable (and boring) than market prices, so they are of little interest to the financial media and their readers.
If you follow a strategy of owning a small number of financially successful companies that have a history of paying and growing their dividends, you can safely ignore market price fluctuations and the stock markets. As a dividend investor, you only need to periodically review the financial performance of the financially stable businesses in your portfolio to confirm that they are expected to continue to grow their dividends into the foreseeable future.
Diversify your investments
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 to establish a minimum number and types of securities required in your portfolio to minimize the risk of losing a major portion of your invested 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, including bonds, treasury bills, or guaranteed investment certificates; and
3) Equity investments (common shares of public companies). In this latter category, many institutions recommend that your equity investments be further diversified among fifty to one hundred different public companies, headquartered in various countries.
Clearly, it would be impossible for most people to effectively manage a portfolio containing such a large number and variety of investments. Therefore, their only practical alternative is to buy mutual funds or exchange-traded funds (ETFs). However, as mentioned earlier, academic studies have shown that the majority of such managed funds underperform their respective benchmark indices and, therefore, many financial experts recommend that investors simply buy a low-cost exchange traded fund (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 unpredictable performance of the overall market.
The disadvantage of investing in index funds is that your annual dividend income will be minimal because most index funds contain a large number of companies, many of which do not pay a dividend.
Rebalance your portfolio holdings.
Financial institutions recommend that you periodically rebalance your portfolio, so that if you hold a position in a company whose market price is growing much faster than the market 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 companies, in an attempt to have the market value of each of your holdings grow at about the same rate.
In Warren Buffett’s opinion, 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, financial institutions are drawing your attention back to unpredictable market price movements and away from the dividend income generated by your investments. If the market price of one of your holdings is increasing because the dividend payments are growing faster than the dividends of some of your other holdings, you might, in fact, consider buying more shares of the company that has the faster rate of dividend growth.
If you are willing to learn how to read and understand company financial statements and evaluate a company’s future financial prospects (neither of which are difficult), you should be able to significantly increase your dividend 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 knowledgeable about corporate finance and investing will enable you to have a more complete understanding of your options and make more informed decisions.
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.