Canadian Dividend Investors
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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
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 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 1 or 2 financially stable companies that offer a significant dividend yield and have 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 holdings 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 time frame for the conversion, however, in order to avoid procrastination, I suggest you plan on taking from 12 to 18 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.
The following figure 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 20 years, the dividend would increase by $1.50, from $1.00 to $2.50 per share. If you held them for an additional 20 years (for a total of 40 years), your dividend income would increase by $4.50, from $2.50 to $7.00, which is almost 3 times faster than in the first 20 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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The rate of dividend growth also has a substantial effect on the magnitude of the dividend income after several decades. For example, as illustrated in Figure 5, if you held the shares of a company for 40 years and the average annual growth rate was 3% (the blue line), your dividend 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 quickly. And of course, the difference in the dividend between the two growth rates, increases as the years pass.
The foregoing figures demonstrate the importance of investing in companies that are expected to grow their dividends at a high rate for as many years as possible. These figures assume that you do not withdraw the dividends you receive each year but use them to buy more shares of the company. Once you start using some of your annual dividend income to fund your expenses, the rate of dividend growth will decrease, depending on the amount of the dividend income you withdraw each year. However, as long as your annual dividend income exceeds the amount you withdraw, you will never need to sell any of your investments, and you could continue to buy more shares with any surplus dividend income.
Once you own shares of a company, any change in the market price of the shares will have no effect on 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 market prices.
The one risk you do need to be concerned about however, is the risk that an unexpected event could have a negative effect on 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 eliminated) by regular monitoring of your company's operations and financial prospects.
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