Canadian Dividend Investors
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Develop Patience
The first prerequisite for successful investing is patience. If you think you don't have patience, begin a process of developing it.
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Lowell Miller
Patience is absolutely essential if you want to become a successful investor. If you are new to investing, begin by investing just a small fraction of your savings. As you gain experience and confidence, you can gradually increase the proportion of your savings you manage yourself.
If your portfolio currently holds mutual funds or exchange traded funds, and you are thinking of changing to a dividend investing strategy, I recommend that you begin by keeping the bulk of your portfolio in the funds you currently own and set aside a small portion (say 5%) of your savings for buying the common shares of one or two financially stable companies that have a significant dividend yield and a record of dividend growth. After several months, as you gain confidence in your ability to select and monitor these companies, you can add additional companies to your portfolio.
It is important not to rush your decisions, and it may take one or two years before you have completely converted your investments to a dividend investing strategy. It is not necessary to set a period for the conversion, although in order to avoid procrastination, I suggest you plan to take from twelve to eighteen months to complete the conversion of your portfolio from managed funds to individual companies.
You may find that you cannot devote sufficient time, or that you simply do not enjoy managing your investment portfolio. If that is the case, you can decide to have a qualified money manager look after your investments or continue to invest in mutual funds or exchange-traded funds.
Figure 1 demonstrates that the longer you hold the shares, the faster your dividend income will grow, and therefore, patience is essential. For example, if the shares had an annual growth rate of 5% and you held them for twenty years, the annual dividend would grow from $1.00 to $2.50 per share, an increase of $1.50. However, if you held the shares for an additional twenty years (for a total of forty years), your annual dividend in those last two decades would grow from $2.50 to $7.00, an increase of $4.50, almost three times faster than in the first twenty years. (A description of the equation used to calculate the relationship between dividend growth and time is presented in Smith, 2019.
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Figure 1: The effect of holding time on annual dividends.
The rate of dividend growth also has a substantial impact on the magnitude of the dividend income after several decades. For example, as illustrated in Figure 2, if you held the shares of a company for forty years and the average annual dividend growth rate was 3% (the blue line), your dividends would increase from $1.00 to about $3.50 per share. However, if the dividends grew at an average annual rate of 5% (the green line) over the same time interval, they would increase from $1.00 per share to about $7.00 per share, about twice as fast as the 3% growth rate.
Figure 2: The effect of the dividend growth rate on annual dividends.
Figures 1 and 2 assume that you do not withdraw the dividends you receive each year but reinvest them in the same companies. Of course, once you start using some of your annual dividend income to fund your living expenses, the rate of dividend growth will decrease, depending on the amount of the dividend income you withdraw each year.
Note that once you own some shares of a company, any change in the market price of those shares will not affect the annual dividend income you receive and, if the dividends continue to grow, so will your income. This is why, as a dividend investor, you can safely ignore gyrating share prices.
The one risk you do need to be concerned about, however, is the risk that an unexpected event could negatively affect the long-term financial success of one of your companies, such that management is forced to cut the dividend. This risk can be reduced significantly (but not entirely) by regular monitoring of the operations and financial prospects of the companies in your portfolio.
1. Lowell, L. 2006. The Single Best Investment, Creating Wealth with Dividend Growth. The Print Project, P.O. Box 703, Bearsville, NY 12409, 2nd Ed., p.27
2. Smith, L.B, 2019. An Effective Investing Strategy for Busy Canadians. Tellwell Talent, Victoria, B.C. pp. 223 to 227