Investing

For Canadian dividend stocks - use ZDV or hand pick?

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  • Oct 28th, 2014 11:27 pm
[OP]
Jr. Member
Jan 13, 2014
130 posts
24 upvotes
Toronto, ON

For Canadian dividend stocks - use ZDV or hand pick?

I need ideas on what to do with my canadian investment part. I am interested in Dividend oriented stocks/ETFs. So far I was buying ZDV that has 0.4% MER. I know about XDV, but I prefer ZDV because ZDV has more holdings (50 vs 30) and lower MER.

My questions are (for bigger portfolios):
1. do you hand pick stocks, lets say from the same pool as ZDV, or you just buy ZDV?
2. If you hand pick, did you consistently over years beat ZDV performance?
3. If you hand pick, what do you do when you have more money added every quarter - do you just add between stocks evenly (does not make sense, as trading fees would be too large), or just top up 1-2 existing positions?

TIA!
64 replies
Deal Addict
Sep 7, 2010
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Nesvar wrote: I need ideas on what to do with my canadian investment part. I am interested in Dividend oriented stocks/ETFs. So far I was buying ZDV that has 0.4% MER. I know about XDV, but I prefer ZDV because ZDV has more holdings (50 vs 30) and lower MER.

My questions are (for bigger portfolios):
1. do you hand pick stocks, lets say from the same pool as ZDV, or you just buy ZDV?
2. If you hand pick, did you consistently over years beat ZDV performance?
3. If you hand pick, what do you do when you have more money added every quarter - do you just add between stocks evenly (does not make sense, as trading fees would be too large), or just top up 1-2 existing positions?

TIA!
1. I do both. I have ZDV and a few CDN stocks.
2. Stocks have done a little better, but not much.
3. I buy monthly, and only buy the 1 security that is either down the most, or up the least.
Deal Addict
Nov 9, 2013
3652 posts
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Edmonton, AB
I was in a similar situation like you in February and ultimately I picked ZDV over buying a bunch of dividend stocks. My reasons were as follows:

1) Low amount of deployable capital / Diversification - I had enough money to set up a synthetic DRIP for 1-2 dividend stocks, but I wanted to diversify. Therefore I wouldn't qualify for a synthetic DRIP. Because ZDV has 50 stocks I was getting more diversification. Of course I could have just researched stocks myself or bought all 50 individual stocks of ZDV for diversification outside an ETF, but then trading fees would have significantly eaten into my investment amount.

2) Monthly distributions - Some dividend payers pay monthly, but for the most part it seems to be quarterly - annual. ZDV pays 6-7 cents a share / month. Dividends are the explore part of my portfolio, with the core portion being index funds which I buy every month. Thus I'm re-investing my ZDV dividends monthly in my TD E series index funds.

3) Less sector concentration - some of the other dividend ETFS in Canada are heavily invested in financials (as is my Canadian cap weighted index fund) where as ZDV has a lesser exposure to financials. Again this comes down to diversification.

If I had enough capital to synthetic DRIP 3-4 dividend stocks I think I would have skipped on ZDV. But, currently with my small portfolio it doesn't make sense (for me) to pay the trading costs to add quarterly to my stock position. The trade off of course is the ZDV MER.

If you are going to individually pick, keep in mind that ZDV uses somewhat of an active strategy actively screening for dividend growers. They re-examine / re-balance annually I think, so keep in mind if you just buy their top holdings they may change in less than a year which would lead to performance differences for better / worse (if ZDV is your benchmark).
Member
Dec 11, 2008
352 posts
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Ottawa
^ Very helpful post, thanks. I've been considering whether or not to branch out into dividend stocks (currently I only hold index funds/ETFs). But I've been thinking perhaps it's better to wait for a correction in the market? Seems to me that index funds are better during bull markets (low dividend yield compared to price of the ETF) while dividend stocks are good to pick up during a bear market (high dividend yield since dividends usually stay about the same but the price drops). Any thoughts?
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Dec 14, 2010
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I prefer to hand pick individual dividend stocks than using any dividend ETF.

No MER, I'm in control on what I'm buying, I can choose valuation and diversify equally amongst sectors.

ZDV is poorly diversified (over 66% in just 2 sectors, energy and financials), some of their top holdings are very overvalued (CPG, BTE, NPI, ARX) and some are overvalued and losing money for 4 years (and forecast to continue losing, like VSN).

Rod
[OP]
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Jan 13, 2014
130 posts
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Toronto, ON
rodbarc wrote: I prefer to hand pick individual dividend stocks than using any dividend ETF.

No MER, I'm in control on what I'm buying, I can choose valuation and diversify equally amongst sectors.

ZDV is poorly diversified (over 66% in just 2 sectors, energy and financials), some of their top holdings are very overvalued (CPG, BTE, NPI, ARX) and some are overvalued and losing money for 4 years (and forecast to continue losing, like VSN).

Rod
When you hand picked - did you do better than ZDV? How do you deal with adding money to these stocks?
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Nesvar wrote: When you hand picked - did you do better than ZDV? How do you deal with adding money to these stocks?
Yes, much better. Not a fair comparison, because ZDV has MER, overvalued companies and losing-money companies in the mix. Even a combination of momentum and valuation ETFs (like WXM.TO and FXM.TO) do better than ZDV. In 2013, my Canadian dividend portfolio returned 22.92%, all 40 stocks paying dividends (ZDV returned 11%, including dividends); from my 40 stocks, 23 raised dividends; dividend increase on average 7.36%. This performance is simply the average of price between January 1 and December 31, performance is actually higher because it buys in the dips (more below).

I always add 25% of total cash at the moment if the stock is fairly valued or undervalued, to get initial exposure. If it's overvalued, I usually set a GTC buy order to buy at EMA(200). Adjust once a month only. Once it buys, then I put another GTC buy order right away, to buy 15% cheaper. If it hits, great, put another another one 15% than the previous one, always 25% of total cash at the time. Unless the stock market is crashing, it will hit EMA(200) once and then bounce back. Every month I do this: If stock price is above EMA(200), adjust GTC order to buy at the revised EMA(200); if stock price is lower than EMA(200), then I keep my GTC order to buy 15% cheaper. Do this for every stock.

I have 2 Canadian dividend portfolios: one of stocks that keep growing dividends, where I never sell (unless fundamentals are flawed) and spend or reinvest the raising income (those are to mimic equivalent of ZDV, that's the one with the posted performance, used on my TFSA, non-reg and Smith Maneuver). And I have another portfolio where I borrow to invest on undervalued stocks that pays dividends (at least 3%) but I sell them as soon as they hit fair price, so it's sort of a "trading" portfolio (equities are the collateral). That one returned 38% last year (including dividends). There is extra money back by writing off the interest paid by dividend, but I didn't include that, so actual return is higher.

Rod
[OP]
Jr. Member
Jan 13, 2014
130 posts
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Toronto, ON
rodbarc wrote: Yes, much better. Not a fair comparison, because ZDV has MER, overvalued companies and losing-money companies in the mix. Even a combination of momentum and valuation ETFs (like WXM.TO and FXM.TO) do better than ZDV. In 2013, my Canadian dividend portfolio returned 22.92%, all 40 stocks paying dividends (ZDV returned 11%, including dividends); from my 40 stocks, 23 raised dividends; dividend increase on average 7.36%. This performance is simply the average of price between January 1 and December 31, performance is actually higher because it buys in the dips (more below).

I always add 25% of total cash at the moment if the stock is fairly valued or undervalued, to get initial exposure. If it's overvalued, I usually set a GTC buy order to buy at EMA(200). Adjust once a month only. Once it buys, then I put another GTC buy order right away, to buy 15% cheaper. If it hits, great, put another another one 15% than the previous one, always 25% of total cash at the time. Unless the stock market is crashing, it will hit EMA(200) once and then bounce back. Every month I do this: If stock price is above EMA(200), adjust GTC order to buy at the revised EMA(200); if stock price is lower than EMA(200), then I keep my GTC order to buy 15% cheaper. Do this for every stock.

I have 2 Canadian dividend portfolios: one of stocks that keep growing dividends, where I never sell (unless fundamentals are flawed) and spend or reinvest the raising income (those are to mimic equivalent of ZDV, that's the one with the posted performance, used on my TFSA, non-reg and Smith Maneuver). And I have another portfolio where I borrow to invest on undervalued stocks that pays dividends (at least 3%) but I sell them as soon as they hit fair price, so it's sort of a "trading" portfolio (equities are the collateral). That one returned 38% last year (including dividends). There is extra money back by writing off the interest paid by dividend, but I didn't include that, so actual return is higher.

Rod
Rod - thank you very much. Very very good information.
Can I ask you - what do you use to pick stocks and specifically track EMA 200? Do you use specific websites, do you subscribe to stock picking software?
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Nesvar wrote: Rod - thank you very much. Very very good information.
Can I ask you - what do you use to pick stocks and specifically track EMA 200? Do you use specific websites, do you subscribe to stock picking software?
For EMA(200), I use stockcharts.com (free). For stock screening, I built my own screener with portfolio123.com (paid), which uses data from Compustat and Valueline. I evaluate those results with fundamental data from S&P Global Database and CapitalIQ (paid) from FAST Graphs, focusing on my main criteria which is growth of operating earnings (normalized tax adjusted earnings using tax rate of each year accordingly). Once a company becomes a candidate to my portfolio, it's a matter of buying undervalued and tracking its earnings. I also have my own criteria to sell, if fundamentals deteriorate.

Rod
[OP]
Jr. Member
Jan 13, 2014
130 posts
24 upvotes
Toronto, ON
rodbarc wrote: For EMA(200), I use stockcharts.com (free). For stock screening, I built my own screener with portfolio123.com (paid), which uses data from Compustat and Valueline. I evaluate those results with fundamental data from S&P Global Database and CapitalIQ (paid) from FAST Graphs, focusing on my main criteria which is growth of operating earnings (normalized tax adjusted earnings using tax rate of each year accordingly). Once a company becomes a candidate to my portfolio, it's a matter of buying undervalued and tracking its earnings. I also have my own criteria to sell, if fundamentals deteriorate.

Rod
Rod,

Thank you again! You are making me re-think how I want to do my investments. Previously I lost money because I picked stocks based on magazine articles or based on "feeling". About 3 years ago I subscribed to "Couch potato" strategy and I am doing better, but I want to do even better. I am very good in Excel and data, so I am ready to learn....

How did you come up with your criteria for buying/selling? Was it experience in trading, or did you read some books, found info online? Did you use some simulation software to confirm your criteria?

Thank you again for sharing your knowledge! I very much appreciate all information you provided here.
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Dec 14, 2010
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Nesvar wrote: Rod,

Thank you again! You are making me re-think how I want to do my investments. Previously I lost money because I picked stocks based on magazine articles or based on "feeling". About 3 years ago I subscribed to "Couch potato" strategy and I am doing better, but I want to do even better. I am very good in Excel and data, so I am ready to learn....

How did you come up with your criteria for buying/selling? Was it experience in trading, or did you read some books, found info online? Did you use some simulation software to confirm your criteria?

Thank you again for sharing your knowledge! I very much appreciate all information you provided here.
I've been investing and trading for 16 years and I've noticed that EMA(200) is usually used to determine bull or bear trend for long term. So that's a great entry point. Pick any solid (boring) stock and you'll see that EMA(200) hits once or twice a year. That's usually the lowest point of the year, so a good bottom carcher. If markets are crashing, then the 15% average down helps to lower your ACB and yield.

Most investors lose money for temperament reasons, not related to financial knowledge. So it only works if one is patient to buy undervalued and not panic to sell a company for less than what is worth. This method helps to take emotions out. It's mechanical, and I adjust once a month only, unless it buys in between.

The books from Graham, Lynch, Piotrosky and Fischer certainly helps, although my main criteria is based on Graham's ideas. To me valuation and earnings growth is what makes investing successful, because stock price follows earnings.

I used portfolio123.com to backtest this, but I personally know people who has been doing this over 40 years, are retired and have 100% of their money in dividend growing stocks. That's my plan too, getting annual raises from Mr Market's pension. Perpetual income, and I believe predictable too if investing with valuation and earnings growth in mind.

There are other strategies out there, but this works for me, has a decent performance and little work to manage it.

Finding a strategy and having a plan is easy. It's hard to stick to it and not panic on years like 2001 and 2008. By focusing on valuation and earnings, I can sleep at night and not panic because everywhere and everyone is saying that this time is different, so sell it. Although it's more fear-based than fact-based, everyone has its breaking point, so this is my strategy to not panic. To me, enduring that is the secret of success, regardless of the strategy.

"The greatest risk of a falling stock price is how the investor reacts to it".

Rod
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Jun 19, 2009
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I certainly appreciate Rod's contributions to this forum and enjoy reading his posts, but you should keep a couple things in mind.

The strategies he talks about are certainly not for beginners. You will need to know your way around charts, TA indicators, earning reports, limit orders etc. This can be overwhelming for a person (although I am not saying you are not capable of doing so). It is quite difficult to even follow, and I've been enjoying reading Rod's posts as they usually provide good insight and you can usually learn something new from them.

As per the topic at hand, I am currently invested in ZDV at the moment, but after reading the posts here, I may consider trying out the dividend growth strategy (as a small part) once the frictional costs become a less significant portion of my portfolio.
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SkimGuy wrote: I certainly appreciate Rod's contributions to this forum and enjoy reading his posts, but you should keep a couple things in mind.

The strategies he talks about are certainly not for beginners. You will need to know your way around charts, TA indicators, earning reports, limit orders etc. This can be overwhelming for a person (although I am not saying you are not capable of doing so). It is quite difficult to even follow, and I've been enjoying reading Rod's posts as they usually provide good insight and you can usually learn something new from them.

As per the topic at hand, I am currently invested in ZDV at the moment, but after reading the posts here, I may consider trying out the dividend growth strategy (as a small part) once the frictional costs become a less significant portion of my portfolio.
I agree. Rod is very disciplined and knowledgeable. Even though he reports that his work now on his portfolio is minimal there was a lot of overhead in time and effort on his behalf in reading the books, understanding the theory, using the websites and developing screens etc. But, moreover, as he has quite often mentioned, once you have educated yourself then being able to control one's emotions and manage one's temperament is more important than anything else.

Warren Buffett also has said this many times using different words. He says: 'Investing is simple, but hard to do'. He once looked at a room full of MBA's from an elite university and told them that maybe 1 or 2 of the hundreds in the room would be successful at investing because to succeed at investing, once one has some basic intelligence, requires the emotional intelligence few people have.

Most people are not willing to put in the time and effort to learn how to actively manage a portfolio and far fewer have the proper emotional makeup and temperament to do it successfully. They are therefore better off using a passive index strategy described in the www.canadiancouchpotato.com blog and the book The Guide to the Perfect Portfolio, both authored by the same person.
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I forgot to detail my selling criteria when investing.

My personal criteria to sell is when one of these factors happens, what I call fundamentals deteriorating, because they don't reflect the normal operation of their long term history (I sell at whichever happens first):

- dividend payout remains above 100% for 2 quarters and estimated EPS declines (with less cash on its balance sheet and an impaired ability to generate cash flow, dividends would be eventually cut). None of my companies in my portfolio had dividend payout ratio for more than 1 quarter, never mind 2 quarters. Buying companies with a low payout ratio helps on periods like 2008.

- dividend gets cut or suspended. I then sell right away. The first rule above prevented me of getting hit with this with ARF and ATP.

- dividends doesn't get raised in 3 years that the sector they belong to is bullish. Lots of stocks stopped growing their dividends in 2008, and that's understandable. I'm fine with that if the sector is in bear mode (which is easily tracked by an ETF for the sector, if the ETF price is below EMA(200)). That's not a reason get cut from my list. But once the sector starts picking up again (ETF for the sector has its price above EMA(200)), then I'll track how these companies are raising dividends. If the company had a past history of raising dividends, it will continue to do so, as long as operating earnings are growing too. If operating earnings keep growing, and the sector is bullish (above EMA(200)) and they don't raise dividends in 3 years, then the company is off my list. This counter resets on the first year that they raise. For example, BNS didn't raise dividends in 2010 (counter starts), but did it in 2011 (counter resets). It didn't raise in 2012 (counter starts), but it did last year (counter resets).

- unrelated to dividends, the other selling criteria would be 3 consecutive years of falling operating earnings for a company. For example, FTS is on my list to be cut. Although they've been increasing dividends for 41 years in a row, the last 2 years of operating earnings have been declining, the estimated EPS for this year is also lower. Unless they beat the estimated EPS this year (with the expensive acquisition they did in Arizona), that will go off my list. I'm still at a profit, and the constant dividend growth has a nice 7.4% yield on cost. So I won't sell for a loss, and I will lower my risk, because stock price follows earnings, and they can only keep raising dividends with declining operating earnings for so long. Once they start showing operating earnings growth again, then I'll buy when it's undervalued or at EMA(200) when it's fairly valued.

Rod
[OP]
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Jan 13, 2014
130 posts
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Toronto, ON
Rod,

Can I still ask you few more questions? I decided to learn much more about investing using your or similar method. I like your investment picking based on "earnings growth" as this resonates with my believes.
I am going to take it slow, make sure that I understand exactly what I am doing before I'll make any move. I know that you cannot "hold my hand" while I am going through this, but I would appreciate if you would still "kick me" into right direction.
I believe understand about your selling criteria, but I would like to get more info about buying criteria.
My understanding that there are 2 separate analysis you do when analyzing buying:
1 - When to buy. You described this as primary based on EMA(200). I believe that I understood your rules and I can follow them or come up with my own similar rules.
2 - What to buy. You described your main criteria "growth of operating earnings (normalized tax adjusted earnings using tax rate of each year accordingly)". If this is not your trade secret, can you give a bit more info on this? Do you compare company earnings to industry average? Or are you just looking for earning increase?


Thank you again for all info!

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