The Real Power of Dividends

Vacation Footwear for Ireland in October!?!

There are some strong opinions out there on which investing strategy is best. Over time, & from a pure numbers perspective, the only thing that really matters is total return. It doesn’t matter whether you get that return from capital gains, dividends, some other kind of distribution, or any combination of those. I suggest to my kids that they invest in low-cost, market index ETFs. They’ve got the time to make that work. No guarantees, of course. Going forward, maybe the American & Canadian markets will do what the Japanese market has been doing since 1989. That might not be a great outcome for them come retirement day.

The closer I get to retirement, the more I worry about running out of money during retirement. Any simulation I run with the 4% withdrawal “rule” always has a few chart lines that wipe out early. And I’m not even planning for an extravagant retirement lifestyle. Not only do I not want to run out of money during retirement, I’d like to think there would be enough left over for my kids to take my ashes back to Ireland when my time is done!

I started out with mutual funds way back. When I realised how much I was paying for underperformance, I got out of those. Then I tried picking growth stocks. I wasn’t very good at that & I lost some money. On the bright side, I didn’t have much money to begin with, so there wasn’t much to lose! Professional money managers were up next. Since I didn’t know what I was doing, I figured they would. Turns out they weren’t keeping pace with the market either & I was paying extra for that underperformance. Though I don’t blame the pros, they were creating portfolios based on my risk aversion. And I was pretty risk averse after getting burned by my own poor stock selections. With the benefit of hindsight, had I gone into index funds from the get-go, I would have fared far better. Despite the risks, that’s why I recommend index-tracking ETFs for my kids.

Now that I’m much closer to retirement, I have a different outlook. While I’m a hybrid investor now, investing in both stocks & ETFs, I have a leaning towards dividend-growth investing. It started with those 4% withdrawal simulations. If 4% was enough to live on, why not just have a portfolio that generates distributions of 4% annually? Rather than have to sell shares for income, couldn’t I just live on the dividends & distributions? Of course, you need a portfolio big enough to make that work. But that’s a whole other story! After years of messing around with the dividend-growth strategy, I finally got around to moving towards that approach a few years back. Now, instead of retiring at 83, I might be able to get out at 79! I’m kidding.

I hope! 😜

The anti-dividend lobby tell me it’s the wrong approach. But if I were already retired, selling shares of those beaten down index funds this year would give me some serious grief. While my dividend-focused portfolio is down year to date, it’s ahead of the market by more than 13%. And that comes with my bond allocation having the worst year in the history of the bond market too. That’s not too shabby. Moreover, those dividends are on synthetic DRIP (dividends are automatically reinvested in more shares of the same equity) so that my share count is increasing at an even faster rate, as the share prices get beaten down.

While the year-to-date market-beating performance is meaningless over such a short spell, I’m more focused on the dividends than the share price. A stock down 50% is buying twice the number of shares than before the downturn. So long as the dividends aren’t cut, I’m happy picking up more shares when things are on sale. While the dividend-growth stocks may not match the long term total return of an index fund, the real power of the dividend-growth strategy is psychological!

I’m off to Ireland for a long-overdue vacation today. I have no idea what I’m hoping the market will do while I’m away. But I’m praying I’ll get there, & back, safely. And that my portfolio keeps on chugging out those dividends while I’m gone. 🇮🇪☘️🍻

Important – this is not investing advice, it is for entertainment & educational purposes only. Do your own due diligence & seek professional advice before investing your money.

Market Crash Lessons

What Next?

I’m trying to encourage my kids to save & invest while they are young. As usual, Dad’s advice turns to muck pretty much right off the bat. The markets tanked. I tell them, with great confidence & authority, that it’s just noise. To keep on saving & investing. That they’re just buying the good stuff on sale now. Listen to Dad.

There are lots of experts out there with advice on how to handle market losses. I must admit, I’m not one of them. I failed my biggest test back during the dot-com crash. I sold off all but one of my holdings then. The only one I held onto went to zero. All the stocks I sold would have made me money. Had I held onto them! What do you think I learned from that experience?

Stay out of the market, it’s just a lottery? Yeah, I did that for a while. Too long a while. But no, that’s not it … the lesson I seem to have learned is to be afraid of selling anything!

Nowadays, rather than chase what’s hot, I buy what’s not. Most of my investments are in bigger, bluer, dividend-growth companies. Or in ETFs that hold companies like that. But that doesn’t make a downward spiral any more enjoyable. Turns out big blue-chips can go down too. I have the same dilemma today: I don’t know if I should sell, hold, or buy more. Not knowing, I do what I do best … nothing! My stocks just sit there, showing red, & I do nothing. The automatic DRIP adds new shares on dividend pay days. I don’t need to do anything with that either.

I have neither the quant skills nor the psychic ability to figure out what happens next in the market. Instead, I’m trying to get more comfortable just doing nothing. It reminds me of the few times in my career where the future of my employment was at risk. When I lost my jobs back then, I had no other sources of income. But I survived. Between the individual stocks & ETFs I own today, I own little pieces of hundreds of companies. What are the chances they’ll all fire me at the same time & kill the dividends? Pretty slim, I think.
What are the chances that they’ll all go to zero? While there are no guarantees, that’s pretty unlikely too.

For a lazy & conflicted investor like me, it was almost a relief when I came round to thinking that doing nothing might be best. I still worry every time I see the market drop further. I wish I could just stop looking. I can’t. But, so far, I’m sticking with the do nothing strategy.

Only time will tell if if I can keep on doing that. And if that was the right thing to do. Especially for the sake of my kids! 😜

Hurricane Investing

Sunset After Fiona

We were very fortunate during Hurricane Fiona & suffered no loss or damage. Our power went out around 5am yesterday but it was back on again, just shy of 6pm, the same day. There are still hundreds of thousands of people without power, & worse, in Atlantic Canada. I hope things get back to normal for everyone quickly. Here, I’m looking at my small challenges of yesterday from an investing perspective.

My power is delivered by a division of Emera (EMA) & they had proactively engaged the assistance of power workers from neighbouring provinces & states in anticipation of the challenges that Fiona would bring to our doorstep. Fortis (FTS) was similarly preparing for events in PEI & Newfoundland. My Telus (T) cellphone remained my only source of information throughout the day & I was able to pick up the latest news from CTV Atlantic on my phone. CTV Atlantic is owned by the media division of BCE Inc. (BCE). A division of that company delivers my internet & cable TV services too. My home is heated by natural gas that comes from a division of AltaGas (ALA) & Enbridge (ENB) also has natural gas delivery infrastructure on the east coast. I filled up ahead of time but, during less stressful times, my local gas station is also a good stop for a coffee & a sandwich at the Circle K convenience store. This is operated by Alimentation Couche-Tard (ATD). Most of us gassed up ahead of the hurricane. Canada’s energy & pipeline companies (CNQ, SU, TRP & many more) all keep us moving. Emergency workers & us regular folk all need to be able to get to those in need, to family & friends, during & after an event like this. Though all the supermarkets in the immediate vicinity were closed, we found a Sobey’s about fifteen minutes away that was open & fully functional. Sobey’s is owned by the Empire Company (EMP.A). There were very few coffee shops open &, even in normal times, everyone is always desperate for a coffee. Those few Timmy’s that still had power had long lineups. Very long lineups! Tim Horton’s is part of Restaurant Brands International (QSR). While it’s always useful to have some cash, all the bank cards seemed to be working at any location with power. The banks (RY, BNS, TD, BMO, NA, CM) were doing their thing during the hurricane too.

Insurance providers, healthcare businesses, construction companies all have a part to play at times like this but I’ll stop now, you get where I’m coming from, eh? Sometimes, the companies we complain about during “normal” times are the ones we depend on when times get tough. I used to complain about paying the price for the products or services that these companies provide. But I moan a whole lot less when I truly need them. And, as a shareholder, the perspective changes too. I tend to complain less when I own a piece of the business. That doesn’t mean we can just buy shares in any company we like, any time we like. Nor does it mean that we can just buy shares in any company that we complain about. While many of these companies fulfill needs that are important to how we live our lives, we still need to figure out if the company offers value to us as an investment going forward.

Fiona made me think a little differently about some of the stocks in my portfolio. I don’t directly own shares in all those mentioned above, but I do hold many of them. And it wouldn’t surprise me if the missing ones are in an ETF I own.

Fiona is finally moving on. Thankfully. Here’s hoping the recovery process goes well for all those impacted by her passage. Stay safe out there.

Important – this is not investing advice, it is for entertainment & educational purposes only. Do your own due diligence & seek professional advice before investing your money.

Growth vs Income Investments

Crypto, NFTs, or Boring Old People’s Stuff!?!

A lot of new investors have found their way into the stock market since the pandemic started. My own kids included. It’s interesting to see the different strategies that these new investors are drawn to. I’m not surprised by their interest in the latest hot stocks. I’m not even surprised by their interest in crypto & NFTs. But I am surprised at how many are looking at high yielding funds. Some of the allure here seems to be wrapped up in visions of early retirement. I think I understand that one!

Are high yield funds a good approach towards achieving early financial independence? Are these funds good choices for those already retired?

I picked two funds that are popular with income investing groups to compare against the market. I wasn’t cherry picking here, I just went with a couple that are popular with some of the groups & blogs I follow online. Overall it came out as I expected, but there were some surprises in the detail. And the devil is always in the detail! For fun, I threw one of Canada’s big banks into the mix. Both fund selections are closed-end funds with high yields. The American-listed fund currently has a yield around 20% & the Canadian-listed one is about 10%. The bank’s dividend is a little over 4.2%.
Those are very different yield numbers but, let’s be real here, it’s hard not to like a 20% yield!

Usually, it’s older investors who are attracted to yield. There is a lot of psychological comfort in retiring with a portfolio that generates enough yield to live on. Without having to sell shares. Younger investors who dream of early retirement are usually more focused on growth. Once the target portfolio size is reached & retirement beckons, it’s then the focus switches to income. That seems to make sense. But some young investors, still in the accumulation stage, are buying these high-yielding funds long before they need an income stream. They are reinvesting the distributions during the accumulation phase & that makes for great income stream growth …

Income Stream with Dividends & Distributions Reinvested

That’s pretty cool, eh? The big yielding funds are crushing the bank’s income stream. And all three are growing the income stream very nicely. But that’s with all the dividends & distributions getting reinvested. When you retire, whether you do that at a young age or at 65, the income stream is now used to cover living expenses. In other words, the dividend reinvesting may stop.
This is what happens to the income stream when you stop reinvesting the distributions …

Income Stream with Dividends & Distributions Removed for Living Expenses

That’s a very different picture now. The distribution from the very high yield fund is dropping with each passing year, the distribution from the Canadian fund is flat, & the income stream from the bank is increasing year by year. In 2022, based on the performance up to now, the bank will likely surpass the income stream from both funds.

Which of these would you like to have as part of your portfolio going into retirement?

Let’s look at something that might be more important for the young investor … portfolio growth.

Here is the CAGR (Compound Annual Growth Rate) of the investments, compared to a low-cost ETF that tracks the S&P 500® index. This one shows the annual growth with all distributions reinvested. To be honest, none of these are too shabby, eh!

And this one shows the growth when the distributions are not reinvested.

In either scenario, going left to right, the better the return. When the distributions were reinvested, the lower yielding options still provided better returns. How could this happen? The US fund had a declining share price over those years. The Canadian fund share price finished 2021 slightly above the share price at the start of 2010. The bank & the index ETF provided the bulk of their returns from growth. I’m not suggesting that any of these investments are better or worse. That will depend on individual needs, which can also change over time. A young investor, with a long investing horizon, will usually have different requirements than an older investor going into retirement.

Even individual retirees will have slightly different needs. One retiree might maintain a growth focus on his personal investments because he has a decent DB pension. Just to maintain a standard of living, another might need a growing income stream to keep ahead of inflation, the big bank might appeal here. While a third might want to maximize income during the early retirement years, so high yield could be more important for this investor. Maybe her husband wants to go nuts travelling while they still can!
It’s possible that you’ll find any or all of the above investments in all three retirees’ portfolios. Though likely in different proportions.

I didn’t compare the results for other funds or stocks, nor did I look at the results over different time periods. When comparing investments, it’s worth checking from a variety of angles. It’s much more than comparing simple share price returns. Total return considers the share price appreciation (or not!) & the dividend income. Beyond that, consider the returns with & without dividends reinvested. This exercise is just one example of why these comparisons are important. Understanding the implications of different investments can help develop a stronger investing strategy. One that might better match what you are trying to achieve. But every contender for a spot in a portfolio should probably be reviewed from a total return perspective. Investigate & evaluate. Carefully!

For a young investor that can tolerate the roller-coaster ride of the market, over the timeframe this example covers, it looks like the advice of Messrs. Buffett & Bogle came out ahead. The index tracking fund provided the greater total return.

Important – this is not investing advice, it is for entertainment & educational purposes only. Do your own due diligence & seek professional advice before investing your money.

Get Rich in One Hour a Week?

The fruits of the labour of others!

Okay, that title is clickbait. It is true though, you can grow a significant portfolio by investing one hour’s income a week. But this approach takes way more time than the optimistic results promised by the typical get-rich-quick scheme you’ll find online.

The US stock market has returned close to 10% annually for about a century now. Though it can be a choppy ride, it still looks like the best game in town for growing wealth. Nobody knows what the market returns will be going forward. But you could do worse than sticking some money into a low-cost S&P 500® index-tracking fund every week. There are no guarantees here but if nothing else, over the long haul, the odds are that it will provide a better return for more people than would buying lottery tickets. It would certainly be a better use of money than smoking or vaping!

It’s easy to talk about investing for big returns if you have a big salary. What if you’re on minimum wage? Sure, the size of the cheque can change the game. But it is the length of time you’re in the game for that produces the best result, regardless of how much you can invest. Starting early is a really big deal with this approach. The less money you make, the more critical it is that you start sooner. Let’s be real here, we would all rather have the bigger paycheque. But you’ll find some highly-paid people hitting retirement age in poor financial shape too. A kid finishing high school starts working & making money years ahead of someone who commits to a primary degree, a masters & a doctorate. Imagine our high school graduate living at home for those same years. While our university student is borrowing money to pay for an education. If our high-schooler starts working & investing earlier, & it doesn’t have to be a huge amount, it is possible for that kid to retire with a bigger nest-egg than the university graduate. Is this just a pipedream?

Okay, let’s look at it another way then.

The average minimum wage across Canada’s provinces & territories, by the end of 2022, will be about $14.36 per hour. Starting at age 20, saving & investing the equivalent of one hour’s work a week could turn into more than half a million dollars by retirement day. That’s not too shabby, eh!
Yes, I know it’s tough to save on minimum wage. But a kid who can save & invest, even a little, but consistently, all the way to age 65, might look forward to a more comfortable retirement. Can you save & invest the equivalent of one hour’s work a week to grow your wealth? If you want to boost your returns, get more invested while you are younger. What it would be like if you saved two hours wages a week from an early age? Imagine how it might turn out if you also invested more of your bonus money, your raises, or your tips?

Don’t imagine, test drive some numbers on a compound growth calculator. You don’t have one on your phone yet? Fix that!

The chart below shows how little you need to save, represented by the grey shaded area, to grow your retirement nest egg significantly. The orange area is the market growth contribution to the portfolio over time. Consistently saving & investing that one hour’s pay, every week, totals about $34k invested over a working lifetime. The market can turn those savings into a retirement portfolio worth about $650k. Amazing what can happen when you have 500 companies working for you! This chart uses the $14.36 per week, compounded quarterly, with a 10% rate of return. You’ll see that the real juice of compounding comes on over time. The earlier you start, the better the chances of a good result.

Juice Your Portfolio – this is a linear extrapolation, the real road will have more bumps & potholes, so the graph would be more squiggly & results can vary significantly. The only thing we know for sure is that investing nothing will produce zero return!

The unfortunate thing with this approach is that does take time. It feels like it’s not doing a whole bunch of anything in the early years. It’s just not exciting. In fact, it can be downright boring. Especially if your buddy is making a fortune in crypto or whatever the current meme stock is. Though market crashes can introduce a little excitement to the mix from time to time! This is one of those things that you need to set & forget. And keep on keeping on. But we’ll get to more about all that in another post.

Important – this is not investing advice, it is for entertainment & educational purposes only. Do your own due diligence & seek professional advice before investing your money. All the above assumes investing inside a tax sheltered account, with low or no transaction costs & no additional fees outside of those inside the low-cost index tracking fund.