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
As Preet Banerjee explains, whether or not 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!
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 finance and investing will enable you to better understand your options and make more informed 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. Unfortunately, some of the advice provided by financial advisors is self-serving and can significantly increase costs and reduce your annual returns.
Common Advice: Only Full-Time 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 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, market prices and stock market gyrations are of little importance to dividend investors and can be safely ignored, except if the market price of one of your favourite companies drops to an attractive value.
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. The reason that the media pays so much attention to the gyrations of the stock market is simply because 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 money managers 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. The financial industry has an incentive to encourage such 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 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.
If you follow a strategy of buying financially successful companies that have a history of paying and growing their dividends, you can safely ignore 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 grow their dividends into the foreseeable future.
Common Advice: 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, what is the minimum number and types of securities required in your portfolio, so that you 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 (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, their only practical option 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 stock market 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 index funds contain a large number of companies, many of which do not pay a dividend.
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 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 then you might, in fact, consider buying more shares of the company with the faster rate of dividend growth.
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. (Preet Banerjee is a behavioural financial researcher.)