Canadian Dividend Investors
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Site Overview
It’s true that money is not the most important thing in life,
but money does affect everything that is important to life.
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Spring Seeding on the Prairies
Many Canadians understand the need to save and invest for retirement, but find it impossible due to the demands of family and career. Moreover, for anyone who does not have a financial background or experience, the task can seem overwhelming. It is not surprising, then, that many Canadians turn the management of their retirement savings over to professional money managers, only to discover after several decades that the value of their investments is insufficient to support them in retirement and they must continue working.
In my opinion, this disappointing outcome occurs because most financial institutions and money managers concentrate their (and your) attention on unpredictable market price movements and capital gains, rather than on the more stable and predictable dividends.
The purpose of this guide is to explain to Canadians how they can invest their savings so that the dividend income generated by their investments will cover their cost of living, making them financially independent. The information on this website is consistent with the information published the the book A Canadian Dividend Investor's Guide to Financial Independence. A copy of the book can be obtained by contacting the author at bruce.smith@telus.net .
The Rise of Index Funds
Market price movements are volatile and unpredictable, due to a myriad of factors including market sentiment, economic conditions, company performance, geopolitical events, and investor behaviour. Even the most financially stable companies, such as banks, experience volatility in their stock prices, making it impossible to predict their market price movements.
Research has demonstrated that price volatility can be mitigated by diversifying your investments among different companies, industries, and countries. This finding led to the development of mutual funds and exchange-traded funds (ETFs), which contain anywhere from twenty to several hundred companies and are managed by full-time money managers who charge a percentage of the value of the fund for their services. Mutual funds and ETFs made investing in the stock market possible for the general public, and such funds have become very popular.
However, financial researchers have since found that the majority of mutual funds and ETFs underperform their respective benchmark indices, such as the S&P/TSX 60 Index, which prompted the creation of index funds. Index funds hold the same companies as their benchmark index, which guarantees that the fund will deliver the same annual return as the benchmark index, minus a small management fee. In the 1980s, computer programs began to be used to automatically update the index funds to match any changes in their respective benchmark index, with the result that the cost to manage index funds fell dramatically.
The Limitation of Index Funds
For those folks who have no interest in managing their investments, index exchange traded funds are certainly a convenient way to invest their savings. A disadvantage of index funds is that the total return of the fund is unpredictable because the movements of benchmark indices are unpredictable. For example, Figure 1 shows the daily closing market prices of the iShares S&P/TSX 60 Index (XIU) exchange traded fund from 2010 to 2025. This fund, which started trading on the Toronto Stock Exchange in 1990, emulates the S&P/TSX 60 Index and is now the largest index fund in Canada.
The total return of an investment in XIU will depend on the market price at the time you purchase shares of the fund, the price you receive when you sell your shares, and the total value of any dividends paid during the time you hold the shares.
Figure 1: Share price of the iShares XIU index fund from 2010 to 2025.
For example, suppose you purchased a share of XIU in January 2015 for $21.00 per share and sold it five years later in January 2020 for $22.00. During that five-year interval, XIU paid a total of $3.40 in dividends per share. Your average annual total return (capital gain plus dividends) over the five-year interval would have been about 4% per year, which is very poor, especially considering that annual inflation during that same period was about 2% per year. Figure 2 summarizes the average annual total return (dividends plus capital gains) for XIU for three different time intervals.
Figure 2: Average annual total return of an investment in iShares XIU depends on when you buy and sell the shares.
As indicated, the average annual total return on your investment, could range from a dismal 4% per year to a spectacular 14% per year, depending on when you purchase the shares and when you sell them. Unfortunately, after you buy the shares of an index fund, your return is unpredictable because the future price of the shares is unpredictable. This is the case for any index fund, simply because future movements of whatever market index the fund emulates, are unpredictable.
It is no wonder that many people are convinced that investing in equities is the same as gambling. And it is, if you focus on market prices and price movements, in an attempt to realize capital gains. Fortunately, there is a much more reliable and less stressful investing strategy, and it begins by focusing your attention on dividends.
The Predictability of Dividends
The stability and predictability of the annual dividends paid by companies varies by industry. For example, Figure 3 presents the annual dividends paid by Teck Resources (TECHB), a Canadian mining company, from 2010 through to January 2025. As shown, the annual dividend paid by Teck Resources varied significantly and unpredictably, primarily because world prices for copper and zinc, which account for about 85% of the company’s production and profitability, are variable and unpredictable.
Figure 3: Annual dividend per share paid to shareholders by Teck Resources.
In contrast, Figure 4 shows the annual dividends paid by the Royal Bank of Canada (RY), which have increased steadily and consistently during the same time period, and it is reasonable to expect that this trend will continue, at least for the next few years.
Figure 4: Annual dividend per share paid to shareholders by the Royal Bank of Canada from 2009 to 2025.
Imagine if you could identify a small number of companies, like the Royal Bank, which have a history of consistently paying their shareholders a growing dividend over several decades. You could create an investment portfolio that would generate a stable and reasonably predictable dividend income that would gradually increase and within a few years cover your cost of living, making you financially independent. Most importantly, your annual dividend income would be independent of market price movements and the vagaries of the stock market. This guide explains how you can achieve this goal, either on your own or working with a financial advisor.
1. Attributed to Robert Kiyosaki, a motivational speaker and financial educator who has written over 25 books, the most well known being Rich Dad, Poor Dad.
1. This quote is widely attributed to Robert Kiyosaki, a motivational speaker and financial educator. who has written over 25 books, the most well-known being “Rich Dad Poor Dad”.